AIG, Lehman Turmoil Bump Mortgage Rates Higher

Is it just a temporary spike or the beginning of a trend higher?

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The increasingly terrifying Wall Street turmoil is reversing—at least for now—a downward trend in mortgage rates.

Thirty-year fixed mortgage rates had fallen measurably in the aftermath of the government's September 7 seizure of mortgage finance giants Fannie Mae and Freddie Mac. But over the past couple of days—thanks to the mayhem surrounding AIG and Lehman Brothers—mortgage rates have reversed course, according to Keith Gumbinger of HSH Associates.

Average rates on conforming, 30-year fixed mortgages jumped from 5.87 percent on Tuesday to 6.11 percent on Wednesday, Gumbinger says. (They slipped back to 6.05 percent Thursday afternoon.) The increase, he says, was driven by investors' growing concerns about the market chaos, which has made them less willing to purchase mortgage-related securities.

Here's what Gumbinger had to say about the development:

What has been driving mortgage rates higher over the past couple of days?

"Complete buyers' strike. The short and sweet explanation is [investors are saying], 'We are not buying any [mortgage-related] paper, and we are active sellers of the stuff we are holding.' The market is already glutted with sellers, and then you get a day like yesterday.... The number of parties available to buy [mortgage-related] paper is dwindling. Lehman goes Monday, they are not going to be buying anything. . . . Then you've got Morgan Stanley this morning walking around going, 'Well, we could be bought by Wachovia.' So they are not active buyers of anything right now. All of this uncertainty has just washed into the marketplace—on top of the already nervous environment. It is just a bloodbath. Is this a temporary spike in rates or the beginning of a longer-term trend higher?

Right now we have a spike up in what has been a general downward trend for interest rates. The economy is soft, inflation pressures are waning—those are two downdraft affects. Liquidity has been at least established for Fannie and Freddie, and the Treasury is going to come on and buy paper too. I think it's probably temporary. Nobody saw the AIG thing coming. The Treasury said, 'We let Lehman fail because everybody knew they were going to fail.' But AIG kind of came out of the woodwork. That surprise is not welcome in the marketplace. It's caused a spike higher in LIBOR [the London Interbank Offered Rate, which banks charge other banks for loans], it's caused a spike higher in mortgage paper yields. But I think it's probably temporary. Cooler heads—theoretically—will ultimately prevail. But the concern is, who's next?