Rates rise amid market turmoil

Mortgage rates rose during a week of turmoil in credit markets.

The benchmark 30-year fixed-rate mortgage rose 18 basis points, to 5.96 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 0.37 discount and origination points.

One year ago, the mortgage index was 6.32 percent; four weeks ago, it was 5.75 percent.

The benchmark 15-year fixed-rate mortgage rose 15 basis points, to 5.46 percent. The benchmark 5/1 adjustable-rate mortgage fell 1 basis point, to 5.5 percent.

Yields on long-term bonds rose this week, especially after investor Warren Buffett offered to reinsure $800 billion worth of municipal bonds. His action made municipal bonds look safer, and that prompted a flight out of U.S. Treasuries and mortgage-backed securities, causing bond yields -- and ultimately, mortgage rates -- to rise.

Conforming limit varies

Two big pieces of news hit the mortgage industry in the past week. First, Congress passed an economic stimulus plan that raised the maximum loan sizes for some conforming and Federal Housing Administration-insured mortgages.

The new conforming limit will vary by metropolitan area, depending on median house prices.

In some places, the conforming limit will remain $417,000. In the priciest areas, such as San Francisco, it will be $729,750. In other places, the new limit will be somewhere in between. A similar formula will apply to limits on FHA-insured mortgages.

Michael Moskowitz, president of Equity Now, a mortgage bank in New York City, is dubious about whether the higher limits are good policy. "It's going to prolong the meandering of (house) values, as opposed to them adjusting" downward, he says. House prices "were pushed up way beyond where they should have been," he says.

The higher loan limits will prolong the sluggish housing market by delaying the inevitable reduction in prices, Moskowitz says.

A lifeline for foreclosures

This week, the federal government and the six largest mortgage servicing companies got together to announce the formation of something called Project Lifeline, a letter-writing campaign to get severely delinquent borrowers to call their mortgage companies and try to work out deals to prevent foreclosures.

The effort won't be a panacea, acknowledges Henry Paulson, secretary of the Treasury. Plenty of foreclosures are coming down the pike. "In terms of subprime and resets, the worst isn't over; the worst is just beginning," Paulson says.

"We all know that. There's close to 1.8 million, 2 million adjustable-rate mortgages where the rate is going to be reset, and the ones that are going to be reset over the next couple of years are that vintage of mortgages where there were the most lax underwriting procedures."

The higher conforming and FHA loan limits are designed to help homeowners in high-priced areas refinance out of troublesome ARMs and into safer fixed-rate mortgages. There's no guarantee that it will work.