Mortgage Rates, at Six-Month High, Threaten Refis and Fed

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The Wall Street Journal
By: Mark Gongloff
December 10, 2010

Rising government borrowing costs have driven mortgage rates to their highest level in six months, challenging the still-shaky housing market and the Federal Reserve's efforts to boost the U.S. economy.

The rate for a 30-year, fixed-rate mortgage averaged 4.61% this week, according to the weekly survey from government-backed mortgage firm Freddie Mac, up from 4.46% a week ago and the highest level since June 24.

The higher rates have likely snuffed out a refinancing boomlet that began earlier this year and put billions of dollars into homeowners' pockets.

"The rate increase has been so sudden and so sharp that it's almost too late for many borrowers to refinance," said Kevin Cavin, mortgage strategist at Sterne Agee in Chicago.

Thirty-year mortgage rates have bounced rapidly from a record-low 4.17% less than a month ago. These rates closely track moves in the yield on the 10-year Treasury note, given that most mortgages are paid off due to sale, refinancing or default in 10 years or less. The 10-year note yield has surged to 3.23% on Thursday from a low of 2.38% in early October. Bond yields and prices move in opposite directions.

While other aspects of the economy, including factory output and consumer spending, have shown some improvement lately, housing still shows few signs of pulling out of its slump. Recent data on home sales, prices and foreclosures have been disappointing. Rising mortgage rates won't help.

"Housing is in the process of a double dip, and this rise in interest rates is certainly another nail in the coffin," said Sung Won Sohn, an economist at California State University, Channel Islands.

The surge in Treasury yields and mortgage rates has come despite the Federal Reserve's efforts to boost the economy by buying up to an estimated $900 billion in Treasury bonds through next June to help ease financial conditions in the economy.

A host of factors have helped drive rates higher, most recently including this week's tax compromise between President Obama and congressional Republicans. The package includes some measures to stimulate the economy and will likely result in higher budget deficits--both of which are anathema to bond investors.

Rates rise naturally in a solid recovery, but an increase now could be problematic for an economy still on shaky ground. Housing makes up the biggest portion of consumer wealth in the U.S., and its activity helps sustain sectors from construction to financial services.

"The backup in rates will mitigate a good portion of any benefit we get from the fiscal stimulus program," said Steven Ricchiuto, chief economist at Mizuho Securities USA.

Rates on 15-year fixed-rate mortgages were 3.96%, up from 3.81%. Both gauges assume prepaid interest of 0.7 point.

The jump in mortgage costs might have made refinancing unattractive for more than five million borrowers, representing about $1 trillion in outstanding mortgage debt, Mr. Cavin at Sterne Agee estimates

This estimate, which represents about 26% of the entire market for conforming, 30-year, fixed-rate mortgages, is based on the number of mortgages outstanding with rates of between 4.7% and 5.1%. It assumes that borrowers need at least a half-percentage-point of rate advantage for a refinancing to make economic sense.

Though there are still plenty of borrowers with higher mortgage rates, the five million who just missed out on lower rates were the most credit-worthy borrowers of all, Mr. Cavin notes. They had the best chance of refinancing at a time when banks have tightened lending standards.

Mortgage rates lag behind Treasury yields a bit, so this week's latest jump in yields will likely mean another surge in mortgage rates in next week's Freddie Mac survey. Every increase in rates pushes another batch of mortgage borrowers out of the sweet spot for refinancing, and rates have been moving fast.

Fence-sitters haven't been jumping into the refi market. The Mortgage Bankers Association said earlier this week that its index of refinancing activity fell last week to its lowest level since early June.

Refinancing activity surged between April and the early fall, as Treasury yields tumbled from 4% to less than 2.5% and mortgage rates fell from more than 5%. After the surge in rates, refi activity is down 42% from its peak in August, according to the MBA index.

The MBA has estimated that refinancings will fall to about $370 billion next year from $921 billion this year and $1.3 trillion in 2009.

Rising rates seem to have had less of an impact on home-purchase activity. New-mortgage originations rose last week, according to the MBA, and have been climbing slowly but steadily since the summer. But mortgage originations are still down more than 12% from a year ago.

Write to Mark Gongloff at

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This page contains a single entry by CFED published on December 10, 2010 4:04 PM.

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