Mortgage Rates Spike as Fed Tapers

Mortgage applications drop as interest rates rise, weekly report says.

Interest rates continued a second month of increases as the seasonally adjusted rate of mortgage applications dropped 6.3 percent.

Interest rates continued a second month of increases as the seasonally adjusted rate of mortgage applications dropped 6.3 percent.

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The seasonally adjusted rate of mortgage applications dropped 6.3 percent following the Federal Reserve's plans to taper its asset buying, according to a weekly report published on Tuesday by the Mortgage Bankers Association.

Interest rates continued a second month of increases, as the average interest rate for a 30-year fixed-rate mortgage backed by the Federal Housing Administration rose to 4.29 percent from 4.25 percent, the report said. The average interest rate for 15-year fixed-rate mortgages rose to 3.74 percent from 3.66 percent, the report added.

[READ: Federal Reserve Shows Household Wealth Recovering]

The Federal Reserve announced on Dec. 18 it would dial back, or taper, its $85 billion monthly asset purchase program to $75 billion, starting in January, which will include mortgage-backed securities.

"Following the Federal Reserve's taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008," said Mike Fratantoni, MBA's vice president of research and economics. "Purchase application volume was weak too, continuing to run more than ten percent below last year's pace."

Interest rates are also on the rise because the economy is improving, so tapering by the central bank will not damage housing market growth as long as consumer confidence remains high, says Paul Edelstein, director of financial economics at IHS Global Insight market research firm.

"Housing can do well when mortgage rates are rising for the right reason," Edelstein says.

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