Are Higher Mortgage Rates Here To Stay?

In the past two weeks mortgage rates are up about .5% because mortgage bonds have sold off significantly. Normally when stocks sell off, bonds benefit, but in this phase of the credit crunch everything is selling off as banks look to raise money. When bond prices drop in a sell off, yields (or rates) rise. Here’s an article on rates rising, and one section describes why Fannie & Freddie government backing has had ‘unintended consequences’ of pushing rates up:

The cost of financing mortgages will grow for the biggest buyers of mortgage debt, Freddie Mac and Fannie Mae, thanks to the plan for the Federal Deposit Insurance Corp. to back the newly issued, unsecured debt of some banks.

By guaranteeing bank debt, the government is making that debt more attractive for investors, and consequently creating more competition for Fannie and Freddie when they look to sell their own securities. To compete for buyers, the mortgage giants will have to raise their own yields – and to pay for that they’ll have to charge borrowers higher interest.

This isn’t a foregone conclusion. With government backing, Fannie and Freddie mortgage-backed bonds are technically as safe as Treasuries which makes them good investments. They’re considerably oversold right now and poised for a rally, at least from a technical standpoint. But there’s nothing normal about this market so technical or even fundamental analysis doesn’t have much bearing until banks can stabilize and recapitalize themselves.