US plan to curb mortgage rates falters

The US Federal Reserve's efforts to drive mortgage rates lower by purchasing home loans have faltered and rates have risen over the past month.

The rise in rates is a disappointment to government officials, who had hoped that a steep fall in house prices and low financing costs would lure new buyers into the nation's depressed housing market.

Since January 13 the rate on standard long-term mortgages charged by lenders to prospective home owners has jumped from 5.04 per cent to reach 5.51 per cent on Friday, according to mortgage market analysts HSH Associates. The jump represents an almost 10 per cent rise in borrowing costs.

The Fed has bought $92bn of mortgage securities since the start of the year under a plan that could see it purchase up to $500bn. The move is part of the US government's efforts to stabilise the housing market, which include taking control of mortgage groups Fannie Mae and Freddie Mac last year, slashing interest rates to nearly zero and proposing modifications to existing loans that would prevent foreclosures.

The rise in mortgage rates follows an increase in interest rates, known as yields, that are paid on US Treasuries. In the US, 30-year mortgages are closely linked to the price of Treasuries.

Plans by the Treasury to raise $2,000bn in new debt over the 2009 financial year are driving yields on government bonds higher and complicating the Fed's efforts to push mortgage rates lower.

In spite of a poor employment report last Friday, which typically would send long-term yields on Treasury bonds lower, they rose.

The rise was sparked by fears about the growing budget deficit and the continued appetite of foreign investors for US government debt. This has driven up the cost of debt in the form of mortgage-backed securities, raised by Fannie Mae and Freddie Mac.

"The Federal Reserve will continue to buy mortgage-backed securities to hold rates down, but if Treasuries keep selling off, I don't think the Fed buying will be enough to keep rates low," said Mahesh Swaminathan, mortgage analyst at Credit Suisse.

This week, the US Treasury will sell a record $67bn in new debt that includes 10-year and 30-year debt.

"At the end of the day the Fed will probably start buying Treasuries in order to keep mortgage rates low," said Tom di Galoma, head of Treasury trading at Jefferies & Co.

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