Despite Fed rate cut, mortgage rates rise a few basis points this week

The Federal Reserve cut interest rates this week. So naturally, mortgage rates went along for the ride, right?

Wrong.

The benchmark 30-year fixed-rate mortgage rose 4 basis points, to 6.32 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.34 discount and origination points. One year ago, the mortgage index was 6.44 percent; four weeks ago, it was 6.58 percent.

The benchmark 15-year fixed-rate mortgage rose 4 basis points, to 6 percent. The benchmark 5/1 adjustable-rate mortgage rose 11 basis points, to 6.41 percent. On larger loans, the benchmark 30-year jumbo rose 3 basis points, to 7.23 percent.

On Tuesday, the Federal Reserve cut the overnight federal funds rate by half a percentage point. The central bank explained that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally."

The Fed's goal wasn't to send mortgage rates lower. Among other things, the central bank wanted to induce lenders to say yes more often -- especially to jumbo borrowers, who have applied for mortgages greater than the conforming limit of $417,000. In the past month, lenders have become more reluctant to extend jumbo mortgages because investors are scared of buying packages of jumbo loans. Investors, both domestic and foreign, are not sure about the quality of the loans out there. That's what has frozen up the jumbo market, and observers believe the Fed was trying to thaw it out.

"I think the Fed took an aggressive stance here," says Bob Walters, chief economist for Quicken Loans. The central bank, Walters says, showed clear concern over what's happening in credit markets, the housing market and the overall economy.

So why did mortgage rates go up this week, instead of heading down? Mortgage rates got ahead of the Fed, that's all. Two months ago, the benchmark rate on the 30-year fixed was 6.82 percent. Not long after, investors started to get clued in that the Fed really might cut short-term rates -- and mortgage rates have fallen in six of the nine weeks since then.

How much did rates fall since that mid-July peak? Last week, they had fallen 54 basis points. This week, the Fed cut short-term rates by 50 basis points, and the 30-year fixed went up 4.

In other words, both the federal funds rate and the 30-year fixed have fallen by identical amounts in nine weeks. The Fed was just catching up.