Mortgage Rates Rise on Cue

Written by: Steve Cook   Thu, February 25, 2010 Beyond Today's News, Crisis Programs

With only 33 days left until the Federal Reserve completes the phase out of its year-old, trillion dollar program to prop up mortgage interest rates by buying mortgage-backed securities, rates are supposed to be rising.  However, they were not cooperating…until today, when Chairman Bernanke was testifying in the Senate.

As of January 25, the phase out was 92 percent complete, according to the Atlanta Federal Reserve Bank.  The Fed purchased a net total of $14 billion of agency-backed MBS through the week of January 13 and an additional $12 billion net in MBS in the following week, bringing the total to over $1.15 trillion of the $1.25 trillion the Fed will purchase by the end of the first quarter. 

Yet a month later rates simply weren’t rising as expected.  Zillow’s mortgage average yesterday 30-year fixed mortgages remained stable at 4.84 percent, down 4 basis points last week, at 4.88 percent.   Bankrate’s number for a 30-year fixed is 5.12 percent, down one basis point from last week and three basis points from January 20.  

The Freddie Mac’s weekly survey was released at noon.  Its average 30-year fixed conforming mortgage jumped 12 basis points to 5.05 percent for the week ending today, up from 4.93 the previous week, but about the same place it was 5.04 percent a year ago.   

With four more weeks of mortgage surveys to go before the full psychological impact kicks, we’ll know whether Freddie’s rates are a trend or an anomaly.

The truth is that no one really knows what to expect should the Fed program end as scheduled.  Forecasts range from a modest increase of only 20 to 40 basis points (JP Morgan) or more, to 5.6 to 5.8 percent (Lawrence Yun at NAR).  Other observers, however, predict a full percentage point (Guy Cecala, publisher of Inside Mortgage Finance) or even more, to as much as two percentage points, taking rates to 6 or 7 percent (Christopher Thornberg, Beacon Economics).

Bernanke made it clear in testimony before the House Financial Services Committee yesterday and the Senate Banking Committee today that the Fed is carefully monitoring rates and its decision on whether to maintain any level of purchasing activity will be based on what they observe.

“We’re interested to see what the effect (of phase out the program) is going to be on mortgage rates. So far the evidence suggests it’ll be a modest effect, which wouldn’t have a big impact,” Bernanke said. 

The phase out of the program is only one leg of a potential “triple whammy” confronting housing markets.  The other two are the end of a similar MBS purchase program by Fannie Mae and Freddie Mac, which have been controlled by the Treasury Department since September 2009 and the expiration of the homebuyer tax credit April 30.  Some have feared a combination of higher mortgage rates and an end to the tax credit, which has been in effect in one form or another since April 8, 2008, will diminish demand.

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