Smart Borrower Blog

Mortgage Rates Once Again On The Rise

Jun 15th, 2009 @ 4:53 PM by Alden Smith

A recent article in Newsweek tells us that it’s a known fact that the Federal Reserve has been working to keep a mortgage rates down.   They have been buying treasury debt in an effort to keep mortgage rates low.   Although that has seen some light at the end of the tunnel, many economists are warning that now rising mortgage rates will put a stop to any rebound that the Fed had worked hard for.

Moody’s, in its weekly   credit outlook released on June 8 said that The Economic Cycle Research Institute’s (ECRI) leading index showed that although the recession may be near an end, higher mortgage yields will stymie any recovery efforts.

Freddie Mac’s Primary Mortgage Market Survey shows that 30-year fixed mortgage rates have jumped to an average of 5.29%.   A week prior to this, there stood at 4.91%.   Now, with treasury yields ever higher, 30-year mortgage rates have been quoted as high as 5.50% on bank websites.

Because of a greater risk, mortgage rates should trade at a premium over 10-year treasury notes.   Analysts say that because the government is fully backing Fannie and Freddie in their purchases, rates have remained low.   John Burns, a real estate consultant in Irvine, California, tells   us that banks would be charging homebuyers a much higher rate if not for Fannie and Freddie because they would have to keep these loans on their own books.

This rise in interest rates could not come at a worse time.   Not only will prospective homeowners hesitate on making a purchase, but the rise in rates will dilute the benefits of the tax credit to first-time homebuyers.   Mark Zandi, chief economist at Moody’s, believes the housing market is the biggest current threat to the economy.   If the Fed must juggle both mortgage rates and treasury yields to keep the economy stable, then there is no real solution.

The ideal situation would be for the Fed to determine how to put an end to mortgage rates being affected by changes in yields through treasury purchases.   Figuring out how to do that would be a monumental task.

Ivy Zelman, chief executive of Zelman and Associates, says that the current rise in 30-year fixed-rate mortgages to its current level had hurt refinancing activity. For one thing, the huge loss in home values has wiped out any equity to a point where the homebuyer would have positive equity with a refi rate between 4.5% or 4.875%. Good news or bad?

There is no easy solution.   No matter how you juggle the figures, someone is bound to end up getting burned one way or another.   The Obama administration has its hands full trying to sort everything out.   It is not an easy task by any means, and we can only hope that someone, somewhere, makes the right decisions.