Mortgage Rates Rise, Despite Fed Cuts

By Jennifer Yousfi
Managing Editor

Despite a 1.25% reduction in the Federal Funds Rate last month, mortgage interest rates have not decreased according to a survey released today (Wednesday) from the Mortgage Bankers Association (MBA).

According to the MBA survey, interest rates for 30-year fixed-rate mortgages averaged 5.72% last week, up from 5.61% the week prior. Rates for 15-year fixed-rate mortgages also increased, averaging 5.18%, up from 5.09%. The increased cost of lending is making it harder to sell or refinance existing mortgages.

And homeowners aren't the only ones feeling the pinch. Recent data compiled by Merrill Lynch & Co. (MER) indicates that businesses are also paying more for debt than they were prior to the Fed's rate cuts.
"It's the clogging up of the credit markets that worries me most," Harvard University economist Martin Feldstein said in an interview with Bloomberg News. "The Fed has done a lot of cutting, the question is whether it's going to get the traction that it did in the past."

Amid concerns that bond insurers will lose their AAA-ratings and the possibility of more subprime-related asset write-downs, lenders are demanding a higher premium for the perceived increase in risk. This is bad news for Fed Chairman Ben S. Bernanke who is desperate to get consumers and business spending again to jumpstart a lagging U.S. economy.

"The problem is that every piece of news we're getting continues to be bad," Stephen Cecchetti, a former New York Fed bank research director and now a professor at Brandeis University told Bloomberg. "They will have to ease more. It's the only thing they can do."

Fed futures are pricing in a 100% chance of a 50 basis point reduction and a 20% chance of a 75 basis point cut at the Fed's next meeting, which is scheduled for Mar. 18.

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