What's Up With Those Crazy Mortgage Rates

The Federal Reserve has trimmed interest rates a number of times, and more reductions seem to be on the way.

Yet home loan rates are setting record highs, dampening demand for the new loans that would help unwind the huge backlog of unsold houses and allow struggling borrowers to refinance.

Recently, a 30-year fixed-rate mortgage averaged 6.37 percent, the highest since mid-October. A 15-year mortgage averaged 5.72 percent, according to the Mortgage Bankers Association.

So what’s the deal?

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Economists tell MoneyNews that while the Fed’s lowering of short-term interest rates seems to be a good thing on the surface, it is actually making many bond investors exceptionally nervous.

They seem to be "pricing in” rising inflation -- bolstering support for higher, not lower, short-term rates.

In any case, mortgages are tied to long-term bonds,those with 10- to 30-year terms, says Adam Petriella, senior director, finance & investments, Marcus & Millichap Capital in Los Angeles.

Strangely, if the Fed succeeds in its project of turning around the U.S. economy, competition among bond investors to buy mortgages could drop instead, pushing up rates even more.

"If the Fed continues to cut rates, mortgage rates could start rising again,” says real estate investor and consultant Jack Sternberg.

There are other factors at work here in the mortgage market, according to market analysts.

The spread between Treasuries and mortgage-backed securities is at its highest level in many years, for instance.

"This is being driven by the perception of investors who believe that mortgage risk is at an all-time high,” says Gary Acosta, chairman of New Vista Asset Management in San Diego.

All of this should be put into perspective, however. Mortgage rates for homes are still at a low point compared to their historic 7 percent to 8 percent range.

"One big reason people can’t refinance is that the value of their homes has declined and they now owe more than their home is worth,” says Greg McGraime, a certified financial planner in New York City.

In the past, too, everyone buying a home had to put a 20 percent down payment. For most purchases, until recently, individuals had to put zero percent, 5 percent, or 10 percent as a down payment.

When the value of a house is appraised to refinance, the bank won’t let those with negative equity process their loans, because there is no collateral, McGraime says.

When is the housing economy’s situation going to improve? Government leaders are now preaching the virtue of patience for investors and homeowners alike.

"Ultimately, though, real relief for the mortgage market requires stabilization, and then recovery, in the nation's housing sector,” Federal Reserve Chairman Ben Bernanke said in a recent speech to community bankers.

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