Mortgage rates rise in volatile week
By Holden Lewis • Bankrate.com

Mortgage rates went up again in a volatile week marked by political tumult.

The benchmark 30-year fixed-rate mortgage rose 9 basis points, to 6.41 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.42 discount and origination points. One year ago, the mortgage index was 6.42 percent; four weeks ago, it was 6.55 percent.

The benchmark 15-year fixed-rate mortgage rose 3 basis points, to 6.14 percent. The benchmark 5/1 adjustable-rate mortgage rose 11 basis points, to 6.49 percent.

Mortgage rates are linked to bond yields. In the last week, bond yields zigged up and zagged down, like the mood of a girl who got an acceptance letter from Harvard and a breakup text message from her boyfriend on the same afternoon.

Weekly national mortgage survey

Results of Bankrate.com's Oct.1, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Take the yield on the 10-year Treasury note. It closed at 3.85 percent Friday, then plunged to 3.61 percent Monday, after the House rejected the $700 billion bailout of financial companies. On Tuesday, the 10-year Treasury mostly recovered, finishing at 3.83 percent. On Wednesday, it fell again during the run-up to a Senate vote on a bailout package that was similar to the one that failed in the House.

Investment gyrations
These gyrations were caused by the movement of investors' money into and out of the bond market. When the House voted down the bailout bill, investors bought the safest investment they could find -- Treasury bills and notes -- causing yields to plunge. Then they moved their money into stocks the next day, causing yields to go up. The next day, money sloshed back into Treasuries again, causing yields to fall.

Something similar happened to mortgage-backed securities, but the up-and-down movements weren't quite as violent because no one buys mortgage bonds for the sake of security when they can buy Treasuries.

After the House rejected the bailout proposal, reporters began scouring for examples of tightened credit. They turned up a few examples: an architect in West Palm Beach, Fla., whose client put a project on hold, car dealerships closing across the country. And jumbo mortgage lenders kept cinching the belt tighter, too.

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'Buy and bail' borrowers
Most jumbo lenders raised the rates on their adjustables, and they tinkered around the edges to disqualify a few more borrowers. For example, Chase stopped underwriting jumbo loans through mortgage brokers for condominiums, second homes and investment properties in Florida. Wachovia stopped underwriting brokered jumbo loans for condos in Florida, too.

"Banks don't want to lend money, and this is the way they have of expressing that," San Francisco mortgage broker Dick Lepre observes mordantly. He's waiting for a lender to require that "your credit score has to be a prime number."

Lenders are beginning to clamp down on "buy and bail" borrowers -- people who are stuck in homes they can't afford and can't sell, so they buy a cheaper house and move into it and stop paying the mortgage on the expensive house. Buy-and-bailers typically say, sometimes truthfully, that they are renting out the old house.

Now some lenders aren't counting the rental income as qualifying income. In some cases, they might make an exception if the prospective borrower can supply a signed lease, a security deposit and a rental check.