Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.
Even as policymakers rushed to support the companies, home loan rates approached their highest levels in five years.
The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent yesterday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.84 percent, the highest since December 2000.
Loan rates are rising around the country because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation's $12 trillion mortgage market.
Worried that the companies may not be as big a support to the market as they have been, bond investors are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.
The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher adjustable rates.
For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimated Louis Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.
While mortgage rates approached these levels this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government's efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers are expected to vote this week on a measure that would give the Treasury Department authority to lend more money to the companies and buy shares in them if they falter.
The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and to buy homes.
“It's detrimental to the housing market,” said Brian Yui, CEO of San Diego-based HouseRebate.com. “It is going to cause prices to go further down. Less people can afford the monthly payments.”
While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available.
A government report based on data on Fannie Mae and Freddie Mac loans said yesterday that home prices fell 4.8 percent in May from a year earlier. That compared with a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.
The worries about Fannie Mae and Freddie Mac have led to weaker demand for securities backed by home mortgages, analysts say. Inflation, which tends to send bond prices down and bond rates up, is another concern.
“You can see it in the price of food,” said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California. “The Fed may have to raise interest rates before the year is up. It definitely increases the cost of housing.”
Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. Yesterday, bond prices, which move in the opposite direction of the yields, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles Plosser, said the central bank might need to raise interest rates to combat inflation “sooner rather than later.”
Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios.
These analysts add that at current prices, the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14.
“I don't see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew Jozoff, an analyst at JPMorgan.
In March, for instance, mortgage rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases.
This time, the coming congressional vote on the Treasury plan to support the companies could help allay investors' fears, said Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm, which owns mortgage securities. “It will go a long way toward reviving demand.”
Staff writer Emmet Pierce contributed to this report.
