Fast Money

Monday - Friday, 5:00 - 6:00 PM ET

Fast Money

Economic Rescue Plan Could Be Economy's Undoing

It seems the plan to rescue the economy could accidentally lead to its undoing. What’s going on?

The trouble stems from spiking mortgage rates, which in turn drove down total home loan applications last week -- that’s according to the Mortgage Bankers Association. The swift rate rise crimps affordability making those monthly payments that much harder to swing.

And as you well know, providing a floor under the tumbling real estate market is a cornerstone of the plan to jumpstart the economy.

What’s gone wrong?

Borrowing costs have soared as bond yields have risen, due to the vast amount of Treasuries flooding the market. Yields continue to rise even as the Federal Reserve sops up hundreds of billions of dollars in bonds – a move that should have kept rates low.

“Mortgage rates went down because of quantitative easing; the decision by the Fed to directly buy bonds to get rates down,” explains Chris Thornberg of Beacon Economics. “But it doesn’t seem to be working.”

In fact, the average 30-year fixed mortgage rate jumped 0.32 percentage point in the June 5 week to 5.57 percent. That was nearly a full point, about 100 basis points, above the record low rate of 4.61 percent in March.

National 30 Year Fixed Mortgage

"Clearly, 50 or 100 basis points more on mortgage rates is enough to matter. It effects what people can afford to buy," says Bill Cheney, chief economist at John Hancock Financial Services .

The swift percentage point rise in mortgage rates cuts the purchasing power of a borrower by about 10 percent, he says.

Sometimes when rates turn higher the housing market actually benefits because buyers rush in before rates climb any further. But that doesn’t seem to be happening this time around.

"Employment is still bad, wages are still low, interest rates are up. That's going to hurt the housing market," Cheney added.


______________________________________________________
Got something to to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap. If you'd prefer to make a comment but not have it published on our website send those e-mails to .

Trader disclosure: On June 10th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Is Long (USO), (AGU), (SKF); Najarian Is Long (AAPL) Call Spread; Najarian is Long (FCX) Calls And Puts; Najarian Is Long (JPM), Short (JPM) Calls; Najarian Is Long (PALM) Call Spread; Finerman Is Long (NOK); Finerman Is Short (USO); Terranova Is Long (RIMM) And Short (RIMM) Sept. Calls; Terranova Is Long (MS) And Short (MS) July Calls; Terranova Is Short (XOM) Call Spread; Terranova Is Short (FCX) And Short (FCX) Puts

Terranova Works For (VRTS); Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.; Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV); Virtus Investment Partners Owns More Than 1% Of (ABD), (CAL), (CLB), (DLR), (EPR), (EXR), (IGE), (MEE), (DBC), (DBV), (DBA), (SKT), (UA), (WBMD); Virtus Investment Partners Owns More Than 1% Of St Mary Land & Exploration Co; Virtus Investment Partners Owns More Than 1% Of  Seagate Tax Refund Rights



CNBC.com with wires