A look back -- and ahead -- at mortgage rates
By Holden Lewis • Bankrate.com

It took most of a year for mortgage rates to sink to their lowest level in a generation. It has taken less than seven weeks to surge all the way back and more.

The benchmark 30-year fixed-rate mortgage rose 7 basis points to 7.25 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 0.65 discount and origination points.

A typical mortgage rate was 7.07 percent at the beginning of the year. After steadily dropping to 6.42 percent in early November, rates have skyrocketed.

That's quite unusual for a recession. Usually, a slowdown in economic activity causes interest rates to fall.

David Berson, chief economist for Fannie Mae, isn't as perplexed as ordinary mortals by mortgage rates' mysterious levitation act. In his year-end economic report, Berson gives several possible explanations for the rise in rates.

Among the possible reasons, according to Berson: interest rates went down too far at the end of October and have rebounded to saner levels, investors are worried about federal budget deficits, and that an economic recovery in 2002 could cause a rise in inflation.

All of these might be true. Berson believes that just as long-term rates might have overshot on the way down in late October and early November, "they may have overshot on the way up over the past month."

He expects long-term mortgage rates to start dropping again sometime over the next few months. He's not about to guess exactly when the temporary downward move will start happening, though. How's that for cautious?

Mortgage rates then and now
2001 was a great year for mortgage shoppers. Mortgage rates were fairly low at the beginning of the year, and they steadily declined from there. When they hit bottom in November, they were at their lowest since May 1967.

For much of the year, homeowners stampeded to mortgage offices to refinance their loans. Business was so brisk in October and November that wholesale mortgage lenders had trouble keeping up, and some borrowers discovered that their lenders couldn't come through with the money before the end of a 30-day rate lock.

Mortgage offices had to perform a kind of financial triage. They rushed through loans for home buyers and put a lower priority on homeowners who were refinancing their mortgages. In late fall, mortgage offices were busier than ever before, and three-quarters of loan applicants were refinancing their mortgages.

As the economy went into a recession, the housing market remained strong. In most of the country, homeowners watched their home values continue to appreciate, even as the manufacturing and then the service and tourism sectors suffered.

At the end of 2000, many economists and investors expected the Federal Reserve to cut short-term interest rates three or four times in 2001. Then the Fed began the year with an unscheduled rate cut, taking most observers by surprise. The Fed cut short-term rates 10 more times, and has hinted that it might cut rates again at the end of January. Even with the overnight lending rate at a 40-year low of 1.75 percent, the Fed says it's not worried inflation will resume.

One of the most delightful books of recent years is The Fortune Sellers by William A. Sherden. This well-recommended book is about the $200 billion business of buying and selling predictions, which Sherden calls "the second-oldest profession." He says the art of predicting events, with the exception of the weather, has scarcely improved since the heyday of the Romans and the Greeks, "who read animal entrails to make major decisions regarding the future."

With that, let's consult the entrails (and economists) and make some guesses at what's in store for 2002:

• Mortgage rates will continue to rise for a while as the economy recovers from recession and the federal government starts piling up deficits again.
• The refinancing boom will fade away. Two months ago, three-quarters of mortgage applicants were refinancing, and now that number is less than 60 percent. It will continue to drop, probably to 25 percent or lower.
• Home prices in most of the country will remain strong. Berson believes home prices will rise higher than the rate of overall inflation, spurred by demand as young people grow up and move out while old people stay alive and keep their houses longer.
• Developers will continue building houses, and people will buy them. That's a pretty safe guess -- October saw an increase in the number of housing permits issued.
• Bankruptcies, delinquencies and late debt payments are on the rise, and they'll keep rising. Mortgage lenders will tighten their lending requirements, and more home buyers will have to get higher-interest subprime loans. More people will lose their houses to foreclosure.
• As foreclosures rise, home equity loans will lose their luster. More people will realize that they can lose their houses if they consolidate credit-card debt into home equity loans, then fail to pay their home equity loans because of job loss, illness, or poor money management.
• At least one, and possibly more than half, of the above predictions will be wrong.