Realty Check

Rising Mortgage Rates Not Fed's Fault

The 30-year fixed hit 5.31 percent last week, the highest level since the first week of last August, according to the Mortgage Bankers Association.

In response, mortgage applications fell 11 percent, driven entirely by a nearly 17 percent drop in refis.

Purchase applications were basically flat, up just 0.2 percent (all seasonally adjusted).

We called it right?? Rates rise when the Fed stops buying Fannie and Freddie MBS March 31st.


"Believe it or not, it had little or nothing to do with the end of the Fed MBS program," says's Greg McBride. "Upbeat economic news — a return of job growth, continued improvement in both the manufacturing and service sectors — pushed bond yields higher, taking mortgage rates along for the ride."

Remember, mortgage rates respond to bond returns, and as the economy improves and the stock market improves, bonds have to pay higher returns to hold onto investors.

This is not to say that the end of the Fed's MBS program won't impact mortgage rates eventually. We have to watch the spread between mortgage rates and yields on Treasuries.

So all this good economic news is perhaps bad news for housing?

Not so fast.

Remember what I said at the top about purchase apps versus refis.

Of course a rise in rates immediately impacts refis because fewer borrowers would see an advantage.

A small rise in rates (remember, historically we're still very very low on the 30-year) doesn't affect buyers as much, especially now as they may be looking to get in on the home buyer tax credit. Add to that rock bottom home prices, and "the increase in rates is small potatoes," adds McBride.

Something really telling in today's mortgage application report though comes down at the bottom:

The government purchase index increased significantly for the third straight week and as a result, the government share of purchase applications increased to 49.9 percent, its highest level since February 1990 and the third highest level in the history of the data.

Higher lending standards are pushing more and more buyers into FHA loans, really the only low down payment loans available. With its newly expanded role in refis (see administration's revamped HAMP program 3/26),I just want to raise a red flag again that FHA is fast becoming a behemoth, with you and me backing it up.

Questions?  Comments?