Fed ‘tapering’ fears push up US mortgage rates

Last updated: June 4, 2013 11:59 pm

Fed ‘tapering’ fears push up US mortgage rates

By Stephen Foley and Michael Mackenzie in New York

The average rate on a US mortgage has soared above 4 per cent for the first time in more than a year, reflecting recent turmoil in the bond market and threatening to undermine the Federal Reserve’s efforts to stoke the US recovery.

The rise has outstripped even the sharp jump in rates on US Treasury debt, whichtook many traders by surprise in May.

Economists said the upswing in homeowner borrowing costs is one of the first significant impacts of concern in the financial markets that the Fed will taper its purchases of Treasuries and mortgage-backed securities, measures which have been holding mortgage rates at historic lows.The daily average rate on a new 30-year mortgage, as calculated by Bankrate.com, stands at 4.1, having been as low as 3.4 per cent at the beginning of May.

The change could affect the US economy in two ways: by making new loans less affordable, it could damp the recent recovery in house prices; and it could reduce the number of Americans refinancing into cheaper mortgages, eliminating savings that have boosted consumer spending.

Keith Gumbinger, vice-president of mortgage research company HSH, said: “The rise in the rate is enough to slow down the refinancing market, as even a small bump up in rates can put homeowners on the fence.”

Refinancing applications had already begun to decrease, falling 12 per cent in the week to May 24 according to the Mortgage Bankers’ Association – the largest single-week drop this year and back to their lowest level since December 2012.

However, many Americans remain unable to refinance, regardless of rates. At the end of last year, 21.5 per cent of borrowers had negative equity in their mortgages, according to CoreLogic.

Mortgage rates have jumped faster than yields on Treasuries because mortgage-backed securities, which finance most American home loans, have fallen more heavily in price. The Fed has been buying approximately $60bn of mortgage-backed securities per month, butofficials have suggested those purchases could begin to taper off soon.

The spread between 30-year mortgage rates and the benchmark 10-year Treasury has widened by 30 basis points to 190 bps in the past three weeks. The spread has previously proved controversial, with some Fed officials wondering if banks weremaking excessive profits on new loans.

John Lonski, chief US economist at Moody’s, says the US economy is “trying on” higher interest rates, as if in a fitting room.

“What we don’t know is if higher borrowing costs will be burdensome on a still sub-par US recovery,” he said. “House prices are up, but we still find that housing looks weak compared to where it was at the latest peak of the cycle. There is still a sense of unease with the market, because of unease over the future for employment income.”

Mr Lonski said it was possible potential buyers would be put off by higher rates, but also possible that they would be spurred to jump into the market, for fear of missing the chance to lock in a low mortgage rate.

Even after the latest jump, long-term borrowing costs for homeowners remain historically low.

Before the financial crisis and efforts by the Federal Reserve to suppress interest rates, the low for 30-year fixed home loans was 5.2 per cent in June 2003, said Mr Gumbinger.