Despite cut, mortgage rate rises

newsday.com

The 30-year mortgage rate rose from 5.57 percent to 5.88 percent in the past week, according to Bankrate.com's weekly survey, despite the Federal Reserve's interest rate cut Wednesday to boost the economy and relax the credit market.

Like other lenders, Bethpage Federal Credit Union barely moved its mortgage rate yesterday after the Fed's benchmark federal funds rate was lowered to 3 percent. In the past week or so, Bethpage's rate for 30-year mortgages fell to about 5.1 percent after the Fed's first emergency rate cut last week, then went up to 5.6 percent and settled at 5.5 percent yesterday.

Mortgage rates are not directly tied to the Fed rate, which looks at the economy short term. They are based on what investors will pay for mortgage-backed securities and on 10-year Treasury notes, which consider long-term prospects and sold at just less than 3.6 percent yesterday.

In the short term, the Fed is worried about a recession, so it lowers the rate to encourage growth, but the market may see signs of inflation in the long term, because outside the housing-related markets, several sectors are doing well.

"If the markets get concerned about the Fed lowering short-term rates too much and they're worrying about inflation, we can see the 10-year rate go up," said Bethpage's chief financial officer, Brian Clarke. He said that the Treasury yield can fall only so far and it's about as low as it gets, which means mortgage rates also can fall only so far.

Jonathan Pinard, head of the Empire State Mortgage Bankers Association, said potential investors in mortgage-backed securities won't buy if they get minimum returns. "Somebody's got a million dollars to invest and they say ... 'I don't want to buy the mortgages at that rate,'" he said, "then the mortgage rate goes up a little bit."