Mortgage Rates Rising Behind Bernanke's Faith In Housing

, Bloomberg


Ben Bernanke
Ben Bernanke

Mortgage rates in the U.S., already increasing at the fastest pace in a decade, are poised to rise even further after Federal Reserve Chairman Ben S. Bernanke said the central bank is ready to slow its purchases of Treasuries and bonds backed by housing loans.

Yields on Fannie Mae's 3.5 percent, 30-year securities have soared 0.39 percentage point in the past two days to a 19-month high of 3.11 percent. The average rate on new loans packaged into such bonds rose last week to 3.98 percent, the sixth straight increase, from 3.35 percent at the start of May, Freddie Mac surveys show.

Bernanke said at a news conference Wednesday in Washington that the rise in mortgage rates hasn't been "so dramatic" as he suggested the housing market may be strong enough to withstand higher borrowing costs. Investors sold bonds that guide home-loan rates as they focused on his expectation that the Fed's $85 billion in monthly debt buying will slow later this year and end around the middle of 2014.

The tone of Bernanke's comments was "very assuring and soothing, but that's like a mother telling her baby that she will be leaving in a very gentle voice," said Tae Park, a money manager in New York at Societe Generale SA who focuses on mortgage bonds. "The baby will still have a fit."

Quantitative Easing

The Fed chairman also said the central bank's holdings, including $1.2 trillion of housing debt, should continue to depress yields. Policy makers don't expect to sell mortgage bonds soon and any changes in their purchasing plans will depend on economic conditions, he said.

Wells Fargo & Co., the largest U.S. mortgage lender, is offering 30-year fixed-rate loans at 4.38 percent, according to its website, up from 4.13 percent on June 18 and 3.88 percent on May 22, when comments by Bernanke to lawmakers and the release of the minutes of the last Fed meeting caused bonds to plummet.

Following a five-year slump, its worst since the Great Depression, housing began to recover last year, fueled in part by mortgage rates that reached a record low 3.31 percent in November after the Fed started its third round of debt buying known as quantitative easing.

Asked by a reporter whether rates exceeding 4 percent would derail the rebound, Bernanke said that "one important difference now is that people are more optimistic about housing" and surveys show they expect prices to climb further.

"And that, you know, compensates to some extent for a slightly higher mortgage rate," he said.

Home prices in 20 metropolitan areas soared 10.9 percent in the 12 months through March, the biggest gain in seven years, as residential real estate is also bolstered by an influx of institutional buyers, limited supply and an improving job market, according to S&P/Case-Shiller index data released May 28.

What's being said

  • Mortgage rates had nowhere to go but up. But given a housing market that's anything but normal, higher rates don't bode well for regular buyers and sellers. As rates rise, fewer regular buyers will qualify for loans. Institutional buyers already have cooled their aggressive purchases because of the rising prices, especially in South Florida.
    Homeowners may be optimistic that the market will push them above water, but given the Fed's latest news and the depth of some owners' debts, that's not a realistic option for many.

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