mortgage

Mortgage rates soar to 5-month highs

In just three weeks, fixed mortgage rates have risen one-quarter of a percentage point.

The benchmark 30-year fixed-rate mortgage rose 12 basis points this week, to 5.35 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 0.47 discount and origination points. One year ago, the mortgage index was 5.2 percent; four weeks ago, it was 5.08 percent.

The benchmark 15-year fixed-rate mortgage jumped 16 basis points, to 4.69 percent. The benchmark 5/1 adjustable-rate mortgage rose 4 basis points, to 4.55 percent.

Rates started rising in the last week of March. At the same time, the Federal Reserve was wrapping up a 15-month campaign to buy $1.25 trillion in mortgage-backed securities. The main goal of the trillion-dollar-plus buying spree was to keep mortgage rates down. So you might expect the end of the Fed's buying program to bring on higher rates.

Weekly national mortgage survey
Results of Bankrate.com's April 7, 2010, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed15-year fixed5-year ARM
This week's rate:5.35%4.69%4.55%
Change from last week:+0.12+0.16+0.04
Monthly payment:$921.38$1,278.32$840.94
Change from last week:+$12.29+$13.55+$3.93

"Mortgage rates jumped last week as the Federal Reserve completed their purchases of mortgage-backed securities," says Michael Fratantoni, chief economist for the Mortgage Bankers Association.

That might sound like a cause-and-effect statement, but it's not. He's merely saying that they happened around the same time.

If the Fed's withdrawal were solely the cause of this rate increase, it would be an easy phenomenon to spot: Mortgage rates would have risen faster than yields on Treasury securities. That hasn't happened -- at least, not definitively.

At the beginning of the year, the average 30-year, fixed-rate mortgage was 1.41 percentage points higher than the yield on the 10-year Treasury. This week, the difference was 1.49 percentage points. If the Fed's withdrawal were to blame for rising rates, that gap between mortgage rates and Treasuries would be wider.

Instead, Treasury yields and mortgage rates have gone up roughly in tandem since March 24. That was the day when investors shied away from an auction of five-year Treasury notes. In response, investors started selling Treasuries, causing yields to rise. Mortgage rates surged along with them.

"I mark it down to a bad auction and lingering concerns about what these budget deficits are going to do to us in the future," says Dick Lepre, senior loan consultant for Residential Pacific Mortgage in San Francisco.

Observers advance multiple opinions to explain why Treasury yields went up and stayed up. Lepre's theory is that investors worry about budget deficits leading to inflation and devaluation of the dollar. There are free-floating concerns about the ability of Greece and a few other European countries to pay their debt.

Finally, there's the notion that the economy is finally growing again, creating jobs. As the economy heats up, interest rates and bond yields are bound to rise as debt markets compete with stock markets.

But the economy isn't out of the woods yet. The housing sector, in particular, looks shaky because foreclosures are almost sure to rise even higher, and young adults are living at home with their parents longer. Both of those factors are holding back home sales and new construction.

The Mortgage Bankers Association says this rate rise has been accompanied by a decline in the numbers of homeowners applying to refinance their mortgages. But purchase applications have gone up in recent weeks, as people take advantage of the homebuyer tax credits. To be eligible for the credit, buyers must have a home under contract by the end of April.

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