There's been a lot of discussion on financial sites about whether mortgage rates are going to rise once the Fed stops purchasing mortgage backed securities. The general consensus is that it they will, although not as much as people might expect. Tonight, I found a really good article that explains the forces in play that will push rates up and also help to moderate them.

In his article entitled Fed's Exit from MBS Program on Course as Planned, Adam Quinones from Mortgage News Daily provides a pretty good examination of what's going to happen. According to him, there are three forces that will impact mortgage rates:

1. The direction and movement of benchmark Treasury yields
2. The perception of risk in holding mortgage-backed securities as an investment (loss of principal investment)
3. Supply and Demand in the agency MBS market

He sees Treasury yields rising modestly over the next three months. This seems a relatively safe bet, unless there are more sovereign default scares and investors continue to stash cash into safe-haven Treasuries.

The perception of risk is a factor of the jobs market and the overall economy. If the job market improves, then risk goes down as default rates slow. If the economy continues to plod along, then risk does not decrease. At the moment, the Fed has been purchasing MBS's almost regadless of risk. Third party investors will surely demand more return in order to take on the same risk and that will cause mortgage rates to rise.

The third part of his equation is loan demand. He writes:

"Since refinance activity peaked in mid-2009, we have observed a progressive slowdown in loan production. More originators are dropping out of the industry while others continue to fight for every loan application. While we have been communicating this observation since late summer, we need the MBA to provide some "official" backing to our outlook. Michael Fratantoni, MBA's VP of Research and Economics, summed up the mortgage environment PERFECTLY:

'Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today's rates.'"

This will decrease the supply of MBS on the market and help to put a roof on rate increases.

So, put it all together:

"There will be demand for agency MBS when the Fed exits the secondary mortgage market. However, investors will likely let MBS valuations cheapen up before becoming buyers again. This will force mortgage rates higher. It is inevitable. In regards to the question "HOW MUCH DO THEY RISE". MNDs (Mortgage News Dailys) inner circle believes the spike won't be as sharp as many anticipate (relative to benchmark Treasuries that is). If the 10 year Treasury note moves as far as 4.00%, we estimate the par 30 year fixed mortgage rate will move as high as 5.50%."

So there you have a glance at how those far more in the know that I are projecting the rise in interest rates. They take projected Treasury yields and then add some factors based on supply and demand.

There are many types of mortgages out there for homebuyers to choose from. Some of them are better than others and there are some that are just a complete disaster from the beginning. Unfortunately, because some buyers do not educate themselves on the types of mortgages or because they have bad credit, they take a less than desirable mortgage and often get into more trouble than they were already in.

An interest-only mortgage is one of those types of mortgages that may sound like a good idea for buyers with bad credit and little money, but there are some disadvantages to these types of mortgages, too. Interest-only mortgages are typically set for a term of either five or ten years or somewhere in between. The name says it all – you are only making payments on the interest charges of the mortgage loan. Once this term expires, the lender recalculates your payments which includes any interest that has not been paid along with the principal. This almost always results in much higher mortgage payments that many buyers cannot afford. As a result, the buyer is either forced to find a way to make those larger payments, refinance the loan or give in to foreclosure.

If a borrower is disciplined with their money, an interest-only mortgage loan may be ideal for them. If they choose to invest the money they are saving each month while only paying on the interest, they can get that extra money to work for them earning a high interest rate. In a nutshell, these borrowers can borrow more money in the short term and pay less while investing their savings for other reasons, whether it is to grow their business, finish college with a higher degree or simply to let it sit in an interest-bearing account. When the mortgage is recalculated after the interest-only term is up, the borrower may have more money than they would have if they had just made the normal mortgage payments.

Interest-only mortgage loans may also benefit some buyers with tax advantages. The money you pay on the interest of your mortgage loan is usually tax deductible, which means that the borrower may be able to deduct 100 percent of their payments on their taxes during the term of the interest-only loan. It is always best to consult with a qualified financial consultant, however, before doing this on your own.

Before signing up for an interest-only loan, weight the advantages and disadvantages. You may be a financial guru and think about the tax benefits of these types of loans, but is it worth the risk? Are you even disciplined enough to put the extra savings toward something useful or in an interest-bearing account or would you be more likely to spend it each month? Weigh the options and be realistic about your financial discipline before agreeing to an interest-only mortgage loan.

Many experts have been expecting mortgage rates to increase any time now. However, the new reports do not show an increase across the board as many have been expecting.

The mortgage rates are still hovering around that five percent mark with the rates for a 30-year fixed-rate mortgage at about 4.5 percent. This figure changes slightly, however, depending on the actual area of the bank. The Zillow website tracks mortgage rates by the hour and its latest report showed the mortgage rates at about 4.77 percent for a 30-year fixed mortgages. That is about .04 percent lower than they were yesterday at about this time. Wells Fargo puts the rates slightly above Zillow’s findings with figures of 4.87 percent for a 30-year fixed. Bankrate.com’s numbers differ from these figures with reports of 5.06 percent on the 30-year mortgage rates.

The rate for a 15-year fixed-rate mortgage is up to 4.21 percent according to Zillow’s hourly tracker. According to Wells Fargo, however, the rate for a 15-year fixed mortgage is 4.25 percent, just barely above that reported by Zillow. If you look at the numbers that Bankrate.com is reporting, you will notice that the 15-year fixed rate is up to 4.36 percent which is .01 percentage point lower than yesterday’s average.

Five-year adjustable mortgage rates are lower than both the 30-year fixed and the 15-year fixed. According to Bankrate’s numbers, these figures average about 3.92 percent while Wells Fargo has them listed at about 3.75 percent. Zillow ranks the five-year adjustable mortgage rates at about 3.58 percent, which is a jump of about .05 percent over yesterday’s numbers.

The Federal Reserve is actually meeting today to discuss the interest rates. We have not reached a satisfactory point in the economy yet and they want to discuss ideas on how to reach that level. We still have high unemployment numbers, weak consumer confidence and a record number of foreclosures happening all the time. Will the Feds try to increase mortgage rates right now or will they continue to keep them low? If they make the wrong decision, it could be even worse news for the American economy. In addition, the housing market recovery could be set back even longer if the Feds are not wise with their decisions. What do you think it will take to get us out of this mess? Is it something that needs to fix itself or are there some ideas that will help the process along?

In today's FOMC statement, the Fed did not change language saying it would keep rates low for an extended period. It also confirmed that it has reached the end of its $1.25 billion purchase of mortgage backed securities.

Here's the specific language about keeping rates low:

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Despite fears of hyper-inflation voiced by many in the investment community, the Fed does not seem worried. So far, prices have supported this stance.

The Fed is also making a bet that mortgage rates won't rise significantly once it ends the purchase of mortgage backed securities. According to the FOMV statement:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month."

Rhe Fed has been slowing the purchase of MBS for some time. Yet, we haven't see any significant increase in mortgage rates.

I expect once the purchases end, rates may move up very modestly - 25 to 30 basis points. What the Fed does with all of securities on its balance sheet is another story. Once it starts to sell them, that could cause a more significant increase in rates, although no one knows for sure.

With the mortgage and housing crisis still looming over the American economy, there are many victims that put a face to the problem. These victims are getting kicked out of their homes and leaving things behind because they got into a situation that they simply could not afford.

One of the latest stories comes out of Pittsburgh and involves, of all things, a parrot. When 46-year-old Angela Iannelli defaulted on her mortgage payments, the bank sent a contractor to her home to change the locks. The contractor also shut off the utilities to the home and confiscated Iannelli’s 11-year-old parrot. It was more than a week before she had the parrot returned to her and the separation was so stressful on her that she had to start taking a prescription medication for her anxiety.

The big twist to the story, however, is that Iannelli was not in default on her mortgage payments, according to a Bank of America spokesman. One of the bank’s employees sent a contractor to secure the property because they made a mistake in thinking the property was vacant. However, according to the spokesperson, the employee should not have done that. A representative for Ianelli said she had missed one payment but she quickly caught it up and was current when the incident happened. Unfortunately, when Iannelli tried to call the lender in protest, they essentially gave her the runaround and told her she would have to retrieve her parrot herself. She also reports being hung up on and she said several bank employees told her that they were tired of hearing from her.

This is just one story in which a homeowner has been a victim to the foreclosure crisis, whether accidentally or as a result of non-payment. Banks and mortgage lenders have been trying to train enough people to handle one of the biggest foreclosures crises since the Great Depression era. According to recent figures, about 15 percent of homes with mortgages are behind in payments. That is almost eight million homeowners! That’s a lot of homes to keep up with and it is getting more and more difficult to hire enough people to deal with the vacant homes and properties efficiently.

In some areas of the country, mortgage lenders have received so many threats of suicide from borrowers who have defaulted on their payments that the companies have actually had to come up with procedures for when this happens. The most common procedure is to call the local police when a homeowner threatens suicide. The people working at the call centers of these mortgage companies are also going through a lot of stress and pressure as they are taking these calls and talking to these people who have sad stories about why they cannot make their payments.

Average mortgage rates moved very little over the past week with the 30-year fixed rate mortgage moving down 2 basis points from 4.97% to 4.95%. The BestCashCow averages also dropped, with the average 30-year fixed rate mortgage moving from 5.015% to 4.964%.

Averages though won't get you a mortgage and I like to check and see what rate is actually available. Since I live in Massachusetts I checked Massachusetts mortgage rates. Below I compared the best rate I could find on a $200,000 30-year fixed rate mortgage with 0 points:

This Week Last Week

Rate: 4.750% 4.750%

Points: 0 0

Fees: $1,995 $1,995

AimLoan.com continues to offer the best 30-year fixed rate mortgage in Massachusetts according to the BestCashCow rate tables at 4.750%. It has remained at this rate for 6 out of the last 7 weeks. Despite all the talk of the Fed ending its program to lower mortgage rates, mortgage rates have shown any indication to date that the are moving up.

Other mortgage averages also showed little movement. The 15-year FRM this week averaged 4.32 percent, down from last week when it averaged 4.33 percent. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.05 versus last week's 4.11 percent. The 1-year Treasury-indexed ARM dropped from 4.27% to 4.22%.

Here's what Freddie Mac had to say about the rate situation:

“During a light week of mixed economic reports, mortgage rates eased somewhat,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Pending existing home sales fell 7.6 percent in January, well below the market consensus of a 1 percent gain. Meanwhile, the economy lost only 36,000 jobs in February, fewer than market forecasts, and the unemployment rate held steady at 9.7 percent. In addition, revisions added a net 35,000 workers to January and December combined.”

Mortgage rates continue to move in a tight range. As the chart shows, they've gone mostly sidways since September of 2009. Many analysts are predicting rates will rise, but we have yet to see any indication of that.

Use the BestCashCow rate tables to find the best mortgage rates in your area.

It seems like the foreclosure crisis is in the headlines every day lately. If the news story is not talking about the latest facts and figures, it is talking about solutions or new problems in the mortgage industry.

One of the latest solutions in the industry is coming from the Obama administration. This new plan is going to pay people to leave their homes. This is quite different from the previous plan which encouraged homeowners who were in danger of defaulting to stay in their homes. However, the latest program allows homeowners who find themselves in underwater mortgages will allow them to sell their home for less than what they owe while giving them some spending money to help them get back on their feet and find a new place. According to the New York Times, this is the administration’s latest and most aggressive attempt to fix something that has gone past any one solution.

Currently, there are at least five million homes that are under risk of foreclosure. The federal government’s recent plan to pump $75 billion of mortgage modification monies into the problem has only helped a small percentage of those millions of homeowners. On the good side, that has helped thousands of people who found themselves in financial troubles. On the bad side, there is much, much more work that needs to be done in order to just make a dent in the problem.

However, the administration feels that if these millions of foreclosures actually happen, it could make the economy even worse than it already is. There have been signs of turning around recently but the foreclosure problem looms like some dark clouds over any chance of recovery. What’s even worse for the administration is that this could all occur during an election year.

Obama’s new plan is scheduled to begin taking effect on April 5. It is aimed to help the hundreds of thousands of people who did not get any help from the previous loan modification program. Under the new program, mortgage lenders will be asked to accept short sale agreements and forgive the difference of what the home sells for and what the homeowner actually owes on the home. For instance, if the home’s current market value is $200,000 and the homeowner sells it for $175,000, the lender will have to absorb the $25,000 difference in order to make the program work. Afterwards, the homeowner will get $1,500 for “relocation assistance” while also avoiding the stigma of walking away from their mortgage responsibility.

Do you think this new program is a good idea? Does the federal government have this kind of money to be throwing around like this? Is it fair to the lenders or to other homeowners who pull out all the stops to make their payments so they do not default? What are your thoughts on this new program?