Mortgage rates rocket up quickly
By Holden Lewis • Bankrate.com

By rising abruptly, mortgage rates bared their claws this week, putting an end to three months of docility.

The benchmark 30-year fixed-rate mortgage rose 21 basis points, to 5.45 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 0.41 discount and origination points. One year ago, the mortgage index was 6.02 percent; four weeks ago, it was 5.23 percent.

The benchmark 15-year fixed-rate mortgage rose 12 basis points, to 4.86 percent. The benchmark 5/1 adjustable-rate mortgage declined 2 basis points, to 4.94 percent.

It actually was worse than that.

Because of its timing, Bankrate's weekly survey didn't capture the entire rate increase. The survey is conducted Wednesday mornings. Rates began rising Tuesday afternoon and continued going up Wednesday morning while the survey was being conducted. Mortgage bond yields -- and with them, rates -- accelerated Wednesday afternoon after the survey data had been collected.

Weekly national mortgage survey

Results of Bankrate.com's May 27, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

It was as if the weekly rate survey were a camera attached to the first stage of a two-stage rocket. The camera snapped a picture as the first stage was being jettisoned -- that's this week's benchmark rate -- while the second stage continued rising even faster than before.

"I guarantee that there are people who were floating, who could have locked last week at 4¾ or 4 7/8 percent, and now they're saying, 'Where's my rate?'" says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla.

Dan Green, mortgage planner for Mobium Mortgage in Cincinnati, told his Twitter followers Wednesday afternoon: "A lender just sent notice, paraphrased: 'Rate sheets are suspended for now. We'll send a new one to you once we figure out WTH (what the heck) is going on.'"

People in the mortgage industry had been warning that rapid rate increases would happen. It was a matter of when, not if. But most were taken by surprise that the rate blowup happened now and not later, and that rates rose so swiftly. They expected rates to ride a jet, not a rocket.

Watch mortgage-backed securities
One can only guess what Bankrate's survey would have said had it been conducted late Wednesday afternoon instead of Wednesday morning. The benchmark 30-year rate likely would have been 15 basis points to 20 basis points higher. As an indicator of how quickly the situation deteriorated, it's instructive to look at the yields on mortgage-backed securities.

At 1 p.m. -- after most of Bankrate's data had been collected -- Freddie Mac's 30-year mortgage-backed security yielded 4.69 percent. At 2 p.m., it was 4.85 percent. That's an increase of more than an eighth of a percentage point in an hour. Similarly, Fannie Mae's bond yield rose 18 basis points between 1 p.m. and 2:08 p.m., according to Bloomberg's chart.

Calculate a monthly mortgage payment Enter the requested information, and click "next" to calculate your payment. • Find the best interest rates in your area.

Mortgage amount: $ Loan term:   years Interest rate:   % per year

The upshot: Mortgage bond yields were at their highest level since late February. Rates followed.

"You know what? The party's over," says Dick Lepre, senior loan consultant for Residential Pacific Mortgage in San Francisco. In this case, "the party" is the remarkably low mortgage rates that had been hanging around since February -- the lowest rates in about 50 years.

Perspective is in order. Lepre points out that rates are still low by historical standards. Since 1985, the 30-year fixed mortgage rate has averaged 7.84 percent. That's distorted by years of double-digit rates in the 1980s and early 1990s, but even if you look at more recent times, today's rates look good. In 2008, the median rate on the 30-year fixed was 6.2 percent, meaning it was higher than that for half the year. In 2007, the median rate was 6.32 percent.

Analysts batted around a number of theories to explain this week's skyrocketing bond yields and mortgage rates. A federal budget deficit of nearly $2 trillion, with other gargantuan deficits to come, is believed to be inflationary, and investors demand higher interest rates to compensate for the inflation risk.

There's also anxiety arising from the impending bankruptcy of General Motors, as well as worry over the continuing decline in home prices, which could bring yet more foreclosures in the next couple of years. The bankruptcy and the foreclosures could cause investors to demand higher interest rates to compensate for credit risk.