How high will mortgage rates go is a question that almost every home owner is wondering right now.  Over the last three weeks mortgage rates have gone from 4.8% to 5.59%.  Some nationwide mortgage lenders are reporting rates as high as 5.95%.  This is a very scary thought if you were in the refinance process.  It is an even scarier thought if you are planning to buy a house in the next few months.  The difference in a percentage point on a 30 year fixed rate mortgage could be tens of thousands of dollars over the lifetime of the home loan.

Another major area of concern are those trying to get a home loan modification to stay in their homes.  President Obama created the Making Home Affordable plan in an effort to allow everyone access to low mortgage rates.  Well, what if mortgage rates are no longer low?  For those that cannot make their mortgage payments and were hoping to modify to low payments, higher mortgage rates might be the nail in the coffin.  Mortgage lenders and banks will still work with these individuals but there is nothing the financial institutions can do if rates are moving higher.

I personally feel that the fluctuation in mortgage rates is very bad news for the overall housing market.  When mortgage rates were near historical lows, we still did not see a bottom in home prices.  Now that mortgage rates are going higher, home prices are sure to fall even more.  Maybe this is just what we need, a final freefall in home prices that will clear out all the excess supply.  It is a very scary thought, but sometimes its easier to just rip the bandaid off rather than slowly pulling it as we have been for over a year now.

The interesting issue we currently have at hand is the fact that the ten year treasury yield started uptrending in January but the prime rate has been set to basically zero for quite some time.  The prime rate has been set at zero because the Federal Government is willing to do whatever it takes to get financial institutions to start lending money again.  If they let the banks and financial institutions borrow money for free, they are likely to start lending to borrowers at a much higher rate.

The issue we currently have has made it very difficult to make interest rate predictions.  There is no doubt that the government is going to keep the prime rate as low as possible until they see the end of the recession at the end of the tunnel.  No one knows when this will be but it doesn’t seem likely in the near term.  So one would think that interest rates would remain low until the government increases the prime rate.

The other side of the argument is that mortgage interest rates are directly correlated to the ten year treasury yield.  With the current ten year treasury yield at 3.7%, mortgage rates should be hovering around 5.6% and not the 4.9% they are at.  The Federal Reserve has created artificial mortgage rates by buying back mortgage backed securities, but there is only so much they can do before free markets actually work and mortgage rates follow the ten year treasury yield.

To make a prediction on where interest rates are headed, you must decide what is a better indicator of interest rates.  Is the prime rate a better indicator or is the ten year treasury yield better?  I personally believe in free markets and do not like the idea that the government is trying to force mortgage rates below 5%.  They have definitely done this for the past two months but eventually they are going to run out of bullets.  There is only so much money that Ben Bernanke can print before other countries stop investing in our currency.

The dollar has already taken quite a plunge since the announcement that the Federal Reserve Bank was going to buy back over $1 Trillion in mortgage backed securities.  It is likely that we will continue to see the dollar sink as the United States is printing this money rather than taxing the citizens.  In my opinion, neither should happen and the government should let free market capitalism work.  As most of you know, that will definitely not happen with the Obama administration.

With all of that being said, I predict that interest rates will head higher with the ten year treasury yield.  If the yield continues its uptrend that started back in January, it is likely that we will see mortgage rates back up to 5.5% or higher.  The government will do everything they can to stop this, but sometimes there is only so much that can be done.  If mortgage rates do continue higher then it will be very interesting to see where the housing market goes.

With higher commodity prices, plummeting home values and the dollar sinking to new year to date lows each and every day, things do not look good for American citizens.  I know that President Obama and his staff are working very hard to help this economy but it seems like we are shooting at a target and missing greatly.  All of the plans he has enacted should begin to show in the economic data, but we have yet to see results.

I will be very interested to see the sentiment of our President if the economy continues on the path it is on.  Unfortunately, most Americans do not realize where we are headed.  There is something to say about being optimistic, but being blind to the fact that things could get much worse is a deathtrap.  I think we all have friends and family who feel the current recession is almost over because “the news said things are getting better.”  Of course the news says things are getting better, most media outlets are in love with President Obama.

I do not like to be the bearer of bad news, but how have things gotten better?  Are any major PRIVATE corporations hiring?  Has anyone seen the value of our currency increase?  Is your home value appreciating?  Are college students getting hired to great jobs like they deserve?  I would imagine that the answer to each of these questions is a solid NO!  Please do not drink the Obama lemonade and think that every plan this man creates is going to help this economy.  I totally admit that he is trying very hard, but some of the ideas he has created are not helping.

I am sure we will continue to try different programs as our president is all about change, but I would like to see a change that actually works.  From the beginning of this presidency I stated that taking money from the rich and giving it to the poor would not help this economy; it looks like I have been right so far.  I also disagree with President Obama feeling that the dollar “remains strong.”  The current results of the President Obama vs Subprime Blogger investment challenge are as follows:

SPY – UP 19.9%
USD – DOWN 5.4%

While President Obama feels the dollar is strong, I believe the opposite therefore I invested in the commodities etfs of Energy, Precious and Base Metals and Agriculture.  Here are my investment returns since March 22nd:

DBA – UP 11.4%
DBB – UP 12.3%
DBE – UP 16.8%
DBP – UP 4.7%

Very interesting to see that I have definitely caught up to the President and I am confident I will dominate this challenge in the years to come!

• Mortgage Rate Trends Reverse Quickly; Rates Headed Higher
• Low Mortgage Rates Not Helping as Home Prices Slide In March
• Home Loan Modification Will Help Stop Foreclosure

Today Bloomberg reported that Goldman, Morgan Stanely and JP Morgan have applied to repay up to $45 billion in TARP funds.  This excerpt from the article pretty much says it all:

The three New York-based banks need approval from the Federal Reserve, their primary supervisor, to return the money, according to the people, who requested anonymity because the application process isn’t public. Spokesmen for the three banks declined to comment, as did Calvin Mitchell, a spokesman for the Federal Reserve Bank of New York.

If approved, the refunds would be the biggest yet to the $700 billion TARP program established by Congress last year during the investor furor that followed the bankruptcy of Lehman Brothers Holdings Inc. Banks are keen to repay the money to shake off restrictions on compensation and hiring that were imposed on TARP recipients in February.

It will be interesting to see who follows suit in this as Bank of America and Citi will now be put on the spot.  The issue at hand is the fact that Goldman, Morgan Stanley and JP Morgan were actually the better of the financial institutions while Bank of America and Citi continue to make horrible financial decisions.  I honestly hope that Bank of America and Citi get their feet on the ground before they feel they should have to start repaying the TARP money they desperately need.

What will this do to mortgage rates?  Well, if the economy is truly getting better, it is likely that this will push mortgage rates higher.  Honestly, I don’t think this is any indication of how the economy is doing so I feel that rates will continue to fall as state in my mortgage rates prediction article.