Mortgage rates rise despite Fed cut
By Holden Lewis • Bankrate.com

Mortgage rates went up this week, despite the Federal Reserve's decision to reduce short-term interest rates.

The benchmark 30-year fixed-rate mortgage rose 17 basis points to 6.17 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 0.36 discount and origination points. One year ago, the mortgage index was 6.13 percent; four weeks ago, it was 6.32 percent.

The benchmark 15-year fixed-rate mortgage rose 21 basis points to 5.89 percent. The benchmark 5/1 adjustable-rate mortgage rose 19 basis points to 6.29 percent.

On Tuesday, the Fed cut the federal funds rate, as expected. The reduction was by a quarter of a percentage point, to 4.25 percent. And thousands of people called their mortgage brokers to seek a good deal.

Weekly national mortgage survey

Results of Bankrate.com's Dec. 12, 2007, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

"I got three phone calls today from people asking, 'Alan, can you lower my rate?'" says Alan Rosenbaum, president of GuardHill Financial Corp., a mortgage brokerage in New York City. "Not only have rates not lowered, they have been going up."

The federal funds rate is for overnight loans and the 30-year fixed-rate mortgage is for loans that last more than 10,000 nights. So it's not a huge surprise that the two forms of debt react differently to economic conditions.

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Why rates went up
A number of factors sent mortgage rates higher this week. For one thing, Rosenbaum says, the stock market rallied in the last week, causing investors to move their money out of bonds and into stocks. When that happens, bond prices fall and yields rise -- and mortgage rates follow bond yields.

Another factor behind the rise in mortgage rates could be the outlook on inflation. A day after the rate cut, the Fed and other central banks announced a plan to inject more cash into the banking system, with the goal of pounding LIBOR yields lower. But there's a trade-off: Lower short-term rates have the capacity to fuel inflation, which causes long-term rates to rise.

Then there are the fees that Fannie Mae, Freddie Mac and mortgage insurance companies are charging on new home loans. To compensate for the risk that these companies bear in a declining market, these companies are tacking on fees and raising premiums. Those actions make home loans more expensive to get, just as many homeowners are being encouraged to refinance out of their adjustable-rate mortgages.