Mortgage rates hit 4-year high
By Holden Lewis • Bankrate.com

Long-term mortgage rates rose this week to their highest level since July 2002, and refinancing activity continued to dwindle.

The benchmark 30-year fixed-rate mortgage rose 7 basis points to 6.51 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 0.32 discount and origination points. One year ago, the mortgage index was 6.02 percent; four weeks ago, it was 6.45 percent.

The benchmark 15-year fixed-rate mortgage rose 5 basis points to 6.17 percent. The benchmark 5/1 adjustable-rate mortgage rose 4 basis points to 6.17 percent.

The 30-year fixed is now higher than it was at the end of July 2002, when the benchmark rate was 6.48 percent. The last time the 30-year fixed had been above 6.5 percent was the week of July 17, 2002, when the benchmark rate was 6.54 percent.

Rates fell after that, leading to the refinance boom of 2003 and early 2004. Now that boom has been muted. According to the Mortgage Bankers Association, just 36.6 percent of mortgage applications last week were from homeowners who wanted to refinance their loans. That's the lowest share of refinance activity since late July 2004.

There are still plenty of people who are refinancing their mortgages, but they're outnumbered by home buyers almost 2-to-1.

ARMs will still power refis
Refinancing activity probably will bounce back, though, even as home purchases level off or decline because of higher rates.

"There are about $2.2 trillion in adjustable-rate mortgages that need to be refinanced as short-term rates continue to rise," says Bob Walters, chief economist for Quicken Loans. "By far the most significant source of refinance activity is homeowners looking to exit adjustable-rate mortgages before those loans adjust to significantly higher rates."

Rates and bond yields continued to rise, partly as fallout from last week's rate policy meeting of the Federal Reserve. The Fed raised the target federal funds rate a quarter of a point on March 28 and implied that at least one more rate hike is forthcoming.

Such an increase in short-term rates doesn't always translate into an increase in long-term rates. In fact, sometimes short-term and long-term rates move in opposite directions. In the last few weeks, though, a phenomenon known as the "flat yield curve" has caused short-term and long-term rates to move in the same direction and by roughly the same amount.

The stone-and-mattress curve
"Flat yield curve" is a term that economists use. We ordinary mortals can picture the concept as a stone under a mattress.

The yield curve describes the difference among the yields on bonds of different lengths. Think of that difference as the thickness of a cushion. The cushion has gotten much thinner in the past year. Explaining the same phenomenon, economists and bond traders would say that the yield curve is flatter.

Take the two-year and 10-year Treasury notes. They make a good example because 30-year, fixed-rate mortgage rates tend to move roughly in concert with 10-year Treasury yields, while two-year Treasuries are more sensitive to Fed rate policy.

A year ago, the two-year Treasury yielded 3.75 percent and the 10-year, 4.48 percent. You could say that the cushion between the two was 73 basis points thick. On Wednesday morning, the two-year Treasury yielded 4.81 percent and the 10-year, 4.85 percent. The cushion had worn down to a paper-thin 4 basis points.

There's hardly any cushion between two-year and 10-year Treasury yields. In this laughably tortured metaphor, a rise in short-term yields is like a pebble under the mattress -- the long-term bond feels it immediately and rises accordingly.