MADISON, Wis. – It was probably just a matter of time. Economists have been predicting for months that mortgage rates would go up, and although they kept pushing the date when they expected it to happen further back, their predictions may just be coming true now, judging from rate activity since the beginning of the month. It's not so much the increase in the 30- and 15-year fixed-rate mortgages that surprises NAFCU Economist Jeff Taylor, it's how fast the rates have gone up. He blames the Federal Reserve for that, specifically the agency's "mixed messages" to consumers in June and July, and then its latest decision Aug. 12 to hold short-term interest rates steady in the hopes that commercial banks' prime lending rate will remain low at 4%. "First (Fed Chairman Alan) Greenspan said the Fed will do anything to battle the softening economy, but then it only cuts rates minimally. Then it makes its latest announcement not to cut the interest rate. The Fed is trying to take rates down," says Taylor. He doesn't dispute a gradual economic recovery has had something to do with the upswing in mortgage rates, "but if that was all it was caused by, then you'd expect to see economic growth go up by the same amounts, and that's not happening," says Taylor. CUNA Senior Economist Steve Rick also disagrees that the higher mortgage rates consumers and lenders are seeing can be explained by economic recovery. He opines that the higher rates have been driven by bond traders' concerns with the federal deficit. "The federal government wants consumers to think the economy is getting stronger, and it is a bit, but the fact is the federal government is borrowing more money and the banks are selling their bond portfolios. So what we have is consumers who typically buy Treasury bonds are selling them because of the low bond prices, and that's what's driving up mortgage rates. It's no reflection of a stronger national economy," says Rick. Still, it's important to remember, Rick says, that "credit unions are not experiencing anything different that other mortgage lenders are dealing with. Rates are going up for everyone, we're all in the same boat and facing the same music." What lenders are hearing is the number of refinances are already starting to drop off. Refinancing activity applications in the first week in August fell 2.4%, said the Mortgage Bankers Association of America, and its barometer of refinancing fell to 4,047.5, its lowest level since the week ending Dec. 6, 2002. The MBAA estimated refinance originations accounted for 72% of mortgage originations in the last five to six years. Once mortgage activity shifts to purchase originations, Rick says marginal borrowers who were able to purchase homes when mortgage rates remained at record lows, will fall off when they start to be priced out of mortgages. To complete the chain of events, said Rick, a drop in demand for mortgages coupled with an increase in supply of homes on the market will eventually force the prices on real estate down. Looking ahead to the rest of 2003, Taylor expects the 30-year fixed rate to stay around 6%. It will take awhile for credit unions to start to see their number of originations fall off because there are still many applications in the pipeline, but he expects they'll start to notice the decline by the fourth quarter 2003. Even when mortgage origination activity begins to slow, Rick says mortgage lending will continue to be an important lending area for credit unions, albeit "there will be new challenges credit unions will have to face." Among these will be channeling loan demand to other areas such as consumer lending. "It's important to remember that the housing market has been the pillar sustaining the economy. If that pillar gets kicked out, that could make for a softer economy and problems down the road," says Rick. -

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