Loan rates unlikely to fall

The Baltimore Sun

CHICAGO - The Federal Reserve has aggressively cut interest rates. Houses are sitting around unsold. The stage appears to be set for mortgage rates to fall as lenders compete to attract that scarce quarry: the well-qualified homebuyer.

You wish.

Rates on 30-year fixed-rate mortgages have remained stubbornly above 6 percent for months. Interest rates on those loans are averaging 6.09 percent, mortgage investor Freddie Mac reported Thursday, an increase from the 6.08 percent the previous week. Rates on five-year adjustable-rate mortgages declined slightly last week to 5.51 percent.

Rates on jumbo loans, those larger than $417,000, were considerably higher, averaging 7.47 percent nationally Wednesday, according to

Several forces are conspiring to keep rates up, economists and mortgage experts say, and they aren't going away anytime soon.

When the subprime-lending bubble burst last summer, many large mortgage brokers went out of business because they could no longer find investors to buy their loans and fund their operations. That means the pool of mortgage lenders is much smaller than it has been in recent years, and billions of dollars in liquidity have disappeared.

Also, surviving lenders are still gun-shy about rising delinquencies and foreclosures, which have forced many to take large write-offs.

"Time heals all wounds, and we haven't had enough time yet to heal this wound," said Diane Swonk, chief economist with Mesirow Financial in Chicago.

But there's even a bigger-picture reason behind the buoyancy in mortgage rates - the expectation that rising inflation is the biggest challenge the economy faces.

Many people think that the U.S. economy has narrowly avoided a recession, and that the worst may be over. If that's true, the Federal Reserve is unlikely to lower interest rates further and, in fact, could start raising them again as soon as October.

With commodity prices rising, especially for oil and food, the Fed may have little choice but to tighten credit to slow inflation, which eats away at the value of wages as well as financial assets, economists say.

When inflation goes on a tear, investors want higher premiums for lending money, which translates into higher long-term interest rates.

"If people are concerned about inflation, they don't want to hold Treasury bonds," said Orawin Velz, senior director of research at the Mortgage Bankers Association in Washington. "If there's a decline in demand for bonds, the price will go down, and the yield will go up."

That's been happening recently with 10-year Treasury notes, the benchmark for mortgage interest rates. But investors are fickle and skittish, Velz said, and their expectations can change with the latest economic report.

For the downtrodden housing sector, the question is whether 6.5 percent interest rates will keep home buyers on the sidelines, slowing an already painful recovery.

Donna Schwan, a real estate agent with MetroPro in Chicago, isn't worried.

"Mortgage rates going up is the best thing that could happen," she declared. "We have a lot of people who are buying now because they want to get in before the rates go higher."

Buyers spoiled by years of rates in the 5 percents need to remember that 6 percent is an attractive rate, she said. Plus, with housing prices declining, a buyer's monthly payment might be the same in spite of that slightly higher rate.

Mike Sante, managing editor of personal finance Web site, agreed.

"Rates are pretty doggone good," he said.

"Historically, anytime you can get a rate below 6.5 percent, you're doing very well. We're not at the double-digit rates of the '80s or even the 7 or 8 percents of the 1990s," Sante said.

The exception is jumbo loans, which are commanding a much higher interest rate than smaller loans that meet the standards of Fannie Mae and Freddie Mac, government-sponsored investors in mortgage loans.

A year ago, a jumbo loan might have cost a borrower an extra half point in interest over a so-called conforming loan. Now the spread is more like a point to a point-and-a-half higher, which translates into a much larger payment.

Susan Chandler writes for the Chicago Tribune.

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