Bailout's Early Impact? Mortgage Rates Jump

While the government's massive plan to inject capital into banks, buy up souring assets, and guarantee bank debt has produced some tentative signs of healing in the credit markets, it also appears to be driving fixed mortgage rates sharply higher.

From the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending October 10:

The average contract interest rate for 30-year fixed-rate mortgages increased to 6.47 percent from 5.99 percent, with points increasing to 1.14 from 1.09 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The sharp increase in rates is linked to a jump in government debt yields. "The yield on the 10-year treasury note—the benchmark for 30-year fixed mortgage rate—moved up about 40 basis points over the course of the week," said a statement by Orawin Velz, the MBA's associate vice president of economic forecasting, that accompanied the report.

So why is the yield increasing? Look no further than the government's $700 billion plan to save the financial system, says Mike Larson, an analyst with Weiss Research. "Bond traders aren't stupid," Larson says. "They are looking at this and saying: 'Who is going to foot this bill?' And it is going to be from selling treasuries." (Additional supply of treasuries works to push their yields higher.)

"It's something that not a lot of people are talking about—and certainly Secretary Paulson's not talking about it—but certainly what they are doing has so far been somewhat counterproductive in terms of what it means for the cost of a generic 30-year, fixed-rate mortgage," Larson says. "It kind of goes back to the idea that there is no free lunch."