The week started with the Fed stating that they plan to keep the Fed funds rate low for the foreseeable future. The news had an interesting impact on cd and savings rates. Short term rates stayed flat while longer-term rates dropped. At the same time, average mortgage rates rose as the Fed signaled an end to its measures to purchase mortgage backed securities and force down rates. In the Fed's words:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010.

Last week, I mentioned that U.S. Treasury Inflation-Protected Securities were indicating that inflation was going to be relatively tame over the next 10 years. Now comes a new article in Bloomberg which says that TIPS are indicating a pick-up in inflation over the next year. According to Bloomberg:

The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.

Of course inflation is currently very tame. Consumer prices rose .4% in Novembmer, with core inflation flat. There is no sign of any goods or services inflation at the moment. The only inflation we've seen is in th stock and commodity markets.

I personally think we'll see some uptick in inflation but not the raging wildfire many are predicting. Large deficits will collide with sluggish demand and high unemployment to keep inflation mostly in check. I expect the Fed Funds rate will be in the 3-4% range in the next 24 months. That means we'll see deposit accounts move off their rock-bottom lows. That's still 2 years away though.

CD and Savings Rates

Savings rates stayed steady at 1.57% APY last week. 1-year CD rates also stayed flat at 1.96% APY. This marks the first time in months that both savings and 1-year CD rates have not dropped. What's even more interesting, is that they held while 3-year and 5-year rates dropped considerably. Three-year rates dropped by 8 basis points from 2.72% APY to 2.64% APY while 5-year CDs dropped from 3.26% APY to 3.21% APY.

Why the difference? I think short term savings and cd accounts are at or near the bottom. Longer-term rates have had a bit more of an inflation premium. But the Fed's announcement last week and the tame inflation data have pushed longer-term deposit rates down. Both depositors and banks seem to be indicating they are not afraid of longer-term inflation.

Looking at the yield ratio we have developed for deposit accounts, the spread the spread between savings rates and 36-month CDs came down again this week due to the drop in 3-year CD rates. This drop in longer-term CD rates reverses the slightly upward movement that we saw since the summer. It's possible we'll see 5-year CD rates below 3% APY in the next couple of months if the current trend continues.

It's still hard to recommend putting money into anything longer-term than a 12-month CD, especially with rising equity markets and signs that the economy may be coming back to life. Many depositors may be willing to lock money away for 5-years at close to 3%. To me that's just not enough of a return for that period of time. For those worried about interest rate risk, cd laddering may be a good way to smooth out the return you receive from your CD portfolio.

Mortgage Rates

According to Freddie Mac's weekly survey, 30 year mortgage rates rose by 13 basis points from 4.81% to 4.94%. Data from th BedstCashCow rate tables show that average mortgage rates actually dropped from 4.97% to 4.95%. Either way, with the Fed getting ready to end its purchase of mortgage-backed securities, we'll probably see rates above 5% shortly. From all indications, mortgage rates are going up, which is bad for homebuyers and the general housing market.

You can compare the best mortgage rates in our new mortgage section.

Several years ago pretty much anyone could get a loan to buy a house or to refinance their existing mortgage. As long as you walked through the doors on your own accord and didn’t bark like a dog, you got the loan. If your credit score was 500 and you needed to borrow 85% of the value of your home, you got the loan; job or no job. One way or another your lender would make it work; not so today.

Mortgage rates have dropped to their lowest levels since the 1940’s, thanks in part to a trillion-dollar intervention by the government. Still, those same banks that were so free with their money four years ago are now becoming tight-fisted. Fearful and limping, lenders are now imposing such stringent requirements on borrowers that many homeowners are locked out.

It is estimated that 6 out of 10 homeowners have mortgages much higher than the current rate of 4.8% for a 30-year fixed loan. The total dollar volume of refinancing will be about $1 trillion. In 2003 when rates were falling as well, the total dollar volume that year was a $2.8 trillion. The Government has succeeded in driving mortgage rates down to the lowest level seen in our lifetime, yet people cannot take advantage of it.

It is highly unusual for mortgage money to be below 5%. Average rates fell to as low as 4.7% in the 1940’s as the Government held down rates to finance World War II and stayed just below 5% until the early 1950’s. In 1952 rates went above 5% and stayed above until this year. This should be a grand slam for borrowers and lenders, but it is just not playing out that way.

Super low rates are soon going to be a thing of the past though. The Federal Reserve program that has driven rates so low consisted of purchasing $1.25 trillion in mortgage backed securities. That program will end in March of 2010 and is not going to be renewed, says the Federal Reserve. Some analysts believe mortgage rates could jump as high as 6.0% in the spring, and that would cost an extra $225 on a $300,000 loan.

Recently the Federal Reserve conducted a survey of lenders and found they are still tightening terms for small businesses and household loans. The banks surveyed said they are under a lot of pressure from regulators to raise their cash reserves which means fewer loans. Lenders are looking at the value of the collateral and the credit of the borrower more intently now. Borrowers contend that more loans now may keep many people out of foreclosure which will hurt the banks down the road.

So what is the answer to the mortgage crisis problem in this country? I just don’t see banks here stepping up and taking on any more risk. Banks and lenders have been badly hurt and are still struggling to keep their head above water. I am not sure creating legislation to make them take more risk is the way to go.

In the UK a few companies have taken matters into their own hands and are offering to refinance people out of their adjustable rate loans and into fixed rate loans. That is not so remarkable until you take into account the type of borrowers that are taking advantage of this. These lenders are actually catering to borrowers who are upside down in their current mortgage, which is also about to reset. Lenders are refinancing borrowers who have to borrow up to 120% of the value of their house, not something you will find here in the states. Should we back legislation that allows judges to magically wipe away millions in debt just so borrowers no longer owe more than the value of their house?

What happens to the bank that has millions of dollars owed to them from borrowers and suddenly the slate gets wiped clean? If you loan someone a hundred bucks you expect him to give it back at some point in the future. Is it fair to have his uncle pop in and go, hey Jon here no longer owes you a hundred bucks. He is kinda broke here so we will cut down his loan to fifty bucks that way he will be able to make the payment. So who is going to eat the losses when millions of dollars are wiped away from banks books? Won’t this just add to their financial woes?

That sounds great for the borrower, but may not be in our country's best interest; or maybe it is…

Good Luck and Happy Borrowing.

Most mortgage rates followed bond yields higher this week. Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.81 percent with an average 0.7 point for the week ending December 10, 2009, up from last week when it averaged 4.71 percent. Last year at this time, the 30-year FRM averaged 5.47 percent.

The 15-year FRM this week averaged 4.32 percent with an average 0.6 point, up from last week when it averaged 4.27 percent. A year ago at this time, the 15-year FRM averaged 5.20 percent.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.26 percent this week, with an average 0.5 point, up from last week when it averaged 4.19 percent. A year ago, the 5-year ARM averaged 5.82 percent.

The 1-year Treasury-indexed ARM averaged 4.24 percent this week with an average 0.7 point, down slightly from last week when it averaged 4.25 percent. At this time last year, the 1-year ARM averaged 5.09 percent.

(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

"Following an upbeat employment report, long-term bond yields rose slightly and fixed mortgage rates followed," said Frank Nothaft, Freddie Mac vice president and chief economist. "The economy shed only 11,000 jobs in November, far fewer than the market consensus forecast, and the unemployment rate unexpectedly fell to 10 percent. In addition, revisions added 159,000 jobs to September and October."

"Notwithstanding, rates on 30-year fixed mortgages are almost 0.7 percentage points below those at the same time last year. This translates into an $81 lower monthly payment on a $200,000 conventional mortgage."

• Compare mortgage rates and mortgage refinance rates.

The 30-year fixed rate loan mortgage averaged 4.71% this week, the lowest level since Freddie Mac began its weekly survey in 1991 and down from 4.78% last week. A year ago, the 30-year mortgage was 5.53%.

The 15-year FRM this week averaged 4.27 percent with an average 0.6 point, down from last week when it averaged 4.29 percent. A year ago at this time, the 15-year FRM averaged 5.77 percent. The 15-year FRM has never been this low since Freddie Mac started tracking it in 1991, and breaks the record low set last week.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.19 percent this week, with an average 0.6 point, up slightly from last week when it averaged 4.18 percent. A year ago, the 5-year ARM averaged 5.77 percent.

The 1-year Treasury-indexed ARM averaged 4.25 percent this week with an average 0.6 point, down from last week when it averaged 4.35 percent. At this time last year, the 1-year ARM averaged 5.02 percent. The 1-year ARM has not been this low since the week ending June 30, 2005, when it averaged 4.24 percent.

"Interest rates for 30-year and 15-year fixed-rate mortgages fell for the fifth consecutive week to an all-time record low while the average rate on 5-year ARMs hovered near its record set in the previous week," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, interest rates on 30-year and 15-year fixed mortgages thus far in 2009 averaged one percentage point below their respective average in 2008.

If you want to know what's fueling the mortgage market, look no further than these record-setting lows. I spoke to my loan officer and he said there has never been a better time to refinance.

• Compare mortgage rates and mortgage refinance rates.

Mortgage rates continue to fall according to Freddie Mac. 30-year mortgage rates matched an all-time low this week and 15-year fixed-rate mortgage rates and 5-year ARMs broke new record lows.

From the Freddie Mac press release:

15-Year FRM Drops to Set Another New Low in Freddie Mac Survey History

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.78 percent with an average 0.7 point for the week ending November 25, 2009, down from last week when it averaged 4.83 percent. Last year at this time, the 30-year FRM averaged 5.97 percent. The 30-year has not been this low since the week ending April 30, 2009, when it averaged 4.78 percent.

The 15-year FRM this week averaged 4.29 percent with an average 0.6 point, down from last week when it averaged 4.32 percent. A year ago at this time, the 15-year FRM averaged 5.74 percent. The 15-year FRM has never been this low since Freddie Mac started tracking it in 1991.

The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 4.18 percent this week, with an average 0.6 point, down from last week when it averaged 4.25 percent. A year ago, the 5-year ARM averaged 5.86 percent. The 5-year ARM has never been this low since Freddie Mac started tracking it in 2005.

The 1-year Treasury-indexed ARM averaged 4.35 percent this week with an average 0.7 point, unchanged from last week when it averaged 4.35 percent. At this time last year, the 1-year ARM averaged 5.18 percent. The 1-year ARM has not been this low since the week ending July 7, 2005, when it averaged 4.33 percent.

(Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

"Long-term mortgage rates eased for the fourth consecutive week to record levels," said Frank Nothaft, Freddie Mac vice president and chief economist." Interest rates for 30-year fixed mortgage loans tied an all-time record low while both 15-year fixed mortgages and 5-year ARMs broke their corresponding records. Interest rates for 30-year fixed-rate loans are currently 0.8 percentage points below this year's peak set in mid-June, which shaves roughly $100 off the monthly payments on a $200,000 mortgage.

"House prices are slowly beginning to firm now. For instance, annual house price declines slowed for the sixth consecutive month in September, down only 3 percent, and represented the smallest decline since February 2008, according the Federal Housing Finance Agency's purchase-only house price index. [PDF] Moreover, 11 of the 20 major metropolitan areas experienced monthly house price increases between August and September, based on the S&P/Case-Shiller® 20-city house price indexes ."

The 30-year fixed-rate mortgage (FRM) averaged 4.78 percent with an average 0.7 point for the week ending November 25, 2009, down from last week when it averaged 4.83 percent. Last year at this time, the 30-year FRM averaged 5.97 percent. The 30-year has not been this low since the week ending April 30, 2009, when it averaged 4.78 percent.

The 15-year FRM this week averaged 4.29 percent with an average 0.6 point, down from last week when it averaged 4.32 percent. A year ago at this time, the 15-year FRM averaged 5.74 percent. The 15-year FRM has never been this low since Freddie Mac started tracking it in 1991.

"Long-term mortgage rates eased for the fourth consecutive week to record levels," said Frank Nothaft, Freddie Mac vice president and chief economist." Interest rates for 30-year fixed mortgage loans tied an all-time record low while both 15-year fixed mortgages and 5-year ARMs broke their corresponding records. Interest rates for 30-year fixed-rate loans are currently 0.8 percentage points below this year's peak set in mid-June, which shaves roughly $100 off the monthly payments on a $200,000 mortgage.