Mortgage Rates – Upward trend seen in fixed mortgage rates

The key catalyst for interest rates going forward will be the end of a Federal Reserve program that buys a sizable chunk of mortgage-backed securities issued by firms such as Fannie Mae and Freddie Mac. That program succeeded in immediately pushing mortgage rates well below the 6 percent mark when it was announced last year.

But the Fed has committed to winding down the program by March. The central bank is betting that by gradually tapering off its purchases, private buyers of mortgage-backed securities, who have largely been absent from the market, will return and rates won’t rise much.

But Amy Crews Cutts, deputy chief economist at Freddie Mac, said interest rates are bound to rise to 6 percent by the end of 2010 because private buyers will demand a higher rate of return on the securities than the Fed did. Lenders may have to raise the rates they charge to consumers to make that happen.

“Extraordinary resources have been put into keeping the rates down and supporting the mortgage markets, and it’s hard to imagine that the rates can go much lower than they are,” Crews Cutts said. “Anything we get at or below 5 percent is a gift at this point.”

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