Mortgage rates make biggest jump in 22 months
By Holden Lewis • Bankrate.com

Mortgage rates boomed this week. Blame it on a bunch of bank bureaucrats in Japan and Germany.

The benchmark 30-year fixed-rate mortgage rose 18 basis points to 6.45 percent, according to the Bankrate.com national survey of large lenders. It was the biggest one-week rise since May 2004. It is also the highest rate since Sept. 3, 2003, when the 30-year fixed rate was 6.47 percent. A basis point is one-hundredth of 1 percentage point.

The mortgages in this week's survey had an average total of 0.34 discount and origination points. One year ago, the mortgage index was 5.87 percent; four weeks ago, it was 6.32 percent.

The 15-year fixed-rate mortgage rose 16 basis points to 6.09 percent. The 5/1 adjustable-rate mortgage rose 11 basis points to 6.13 percent. Yes, the rate on a five-year loan is higher than the rate on a 15-year loan.

Mortgage rates are influenced by the same market forces that set the interest rates on federal government debt. They are global market forces. Vast amounts of money slosh to and fro, chasing the best bang for the buck, euro or yen. Some of that money has been moving out of the United States, and rates are rising to entice it back in.

The European Central Bank, headquartered in Frankfurt, Germany, is that continent's version of our Federal Reserve. Last week it raised short-term rates by a quarter of a percentage point. Naturally, investors took advantage and parked their money in Europe.

The action in Europe affects U.S. interest rates because it creates less demand for American bonds. Whether you're talking about mortgage-backed securities or U.S. Treasury notes, demand for those securities softened as demand for their European counterparts grew. In reaction, U.S. bond prices fell -- and when bond prices fall, yields rise. Mortgage rates are another link in that chain: As yields rise for mortgage-backed securities and U.S. Treasuries, mortgage rates go up.

The bank of Japan was expected to raise that country's short-term rates this week. Japan's expected action is a big deal, because its short-term rates have been near zero percent for five years. The mere prospect of a slight rise in Japanese short-term rates was enough to exert upward pressure on U.S. bond yields.

"Those yields need to rise just a bit to attract capital from abroad," says Frank Nothaft, chief economist for Freddie Mac. He's talking about yields rising in Europe and Japan, but he just as easily could be talking about the United States, too.

Mark Lefanowicz, chief executive of Pleasanton, Calif.,-based E-Loan, believes there's another factor at work, too: The growing realization that the Federal Reserve is going to increase short-term rates late this month and probably again in May.

The Fed's rate-setting committee meets roughly every six weeks. Usually, investors conclude five or four weeks in advance that the Fed is going to hike rates, and so the Fed increase is "baked in the cake" long before the central bank meets. "I think that happened a little bit slower than it happened in the past," Lefanowicz says, so the accompanying increase in mortgage rates happened in one week instead of over several weeks.

The sharp rise in rates hasn't scared borrowers away from mortgage offices. Mortgage applications held steady, according to the Mortgage Bankers Association.

Sometimes a jump in rates acts as a lure, as homeowners jump off the fence and refinance before it's too late. That hasn't happened this time.

"No, I don't see folks going, 'Oh, last chance, last chance.' Activity has been relatively the same," says Dan Green, regional vice president of 21st Century Mortgage Bankers in Westmont, Ill.