Fannie Mae and Freddie Mac

Mortgage rates are rising because of the troubles at loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.
Even as policymakers rushed to support the two companies, home-loan rates approached their highest levels in five years.

The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.

Loan rates are rising because of concern in the financial markets about the future of Fannie and Freddie, which own or guarantee nearly half of the nation's $12 trillion mortgage market.
Worried about the companies' financial health, bond investors are driving up interest rates on their debt, and the added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.

The rise in rates is of greatest concern for homeowners whose mortgages require them only to pay the interest due on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates. For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimated Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.

While mortgage rates approached those levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government's efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers this week are expected to vote on a measure that would give the Treasury Department authority to lend more money to and buy shares in the companies if they falter.

The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and buy homes.

"When we get to rate levels like this, the market just shuts down," Barnes said.
While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have tightened significantly in the last 12 months, and many popular loans no longer are available.

A government report based on Fannie Mae and Freddie Mac loan data said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.
Analysts say the rise in rates is a result of weaker demand for securities backed by home mortgages and of rising concern about inflation, which tends to send bond prices down and bond rates up.

In a securities filing released on Friday, Freddie Mac suggested that it might have to reduce or slow the growth of its mortgage portfolio to bolster its capital.

Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee another $3.7 trillion in securities held by other investors. The companies have a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the recent boom.