Mortgage rates rise, defying Fed’s efforts to slash them

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The Federal Reserve is trying to push mortgage rates down. But the marketplace has other ideas.

Home loan rates rose this week to the highest level since mid-December, according to mortgage finance firm Freddie Mac’s latest survey of lenders nationwide.

The average rate on 30-year loans was 5.25%, up from 5.10% last week and the highest since the rate hit 5.47% the week of Dec. 7.

‘I don’t think this is going as planned,’ said Tom Atteberry, a bond fund manager at First Pacific Advisors in Los Angeles.

The Fed in early January launched an unprecedented program to buy mortgage-backed bonds for the central bank’s own portfolio. The idea: By boosting demand for mortgage securities, the Fed hoped to pull down interest rates on the bonds, which in turn was supposed to lower rates on new home loans used to back such securities.

The plan worked -- for a few weeks. Annualized yields on mortgage bonds issued by Freddie Mac and Fannie Mae slid to well under 4% by mid-January.

And the average 30-year home loan rate fell to 4.96% the week of Jan. 11, the lowest since at least 1971. That triggered another rush of loan applications from homeowners seeking to refinance, and in general stoked hopes for the still-struggling housing market.

But even as the Fed has continued to buy billions of dollars’ worth of mortgage-backed bonds each week, market yields on the securities have rebounded sharply, which has helped to push up home loan rates.

One factor driving mortgage bond yields higher in recent weeks has been a jump in yields on long-term Treasury bonds. Some investors have balked at buying Treasuries because they know the government will borrow record sums this year, and figure yields are certain to rise further.

Another issue putting upward pressure on mortgage rates: Some lenders have been so swamped with refi applications that they’ve raised rates to avoid facing a bigger backlog, said Keith Gumbinger, vice president at mortgage research firm HSH Associates in Pompton Plains, N.J. ‘They’re trying to get business to ease off,’ he said.

But some analysts say the biggest problem the Fed faces in trying to manipulate home loan rates is that private investors want a higher return on mortgage-backed securities than the Fed is willing to accept for itself.

‘They’re trying to artificially move the rates away from where the market thinks they should be,’ Atteberry said. A 5% annualized yield on mortgage bonds is about the minimum many investors will accept on a security that is likely to have an 11- or 12-year life, he said.

The rebound in mortgage rates ‘is the market starting to exert its discipline,’ Atteberry said.

It’s a reminder to the Fed that although it directly controls short-term interest rates, its power over long-term rates has always been limited, and still is.

-- Tom Petruno