Signup for our free newsletter:

The TARP and Higher Mortgage Rates

Written By Brian Hicks

Posted October 16, 2008





Back during the hey-day of the housing bubble there was one thing that made it all possible in the first place.  

And it happened long before the banks went haywire giving money to people that couldn’t possibly pay it back.

That was the falling interest rates that came courtesy of Alan Greenspan and foreign treasury buyers.

The reason for this, of course, was simple: Consumers had no problem bidding up home prices as rates continued to drop.

In fact, the lower rates fell, the higher home prices could jump.  And not surprisingly they did.

Easy enough.

Since then interest rates have been pretty stable falling in a range between 5.5-6.5%. That—believe it or not— has helped to keep prices elevated, even as the bubble now pops.

That’s why the possibility of much higher home mortgage rates now is the sector’s worst nightmare. Higher rates will put this zombie in the grave for good.

But that may be one of the unintended consequences of all of these bailouts—-higher treasury yields on 10 year notes. With them comes higher mortgage rates.

Here’s the skinny on that score.

From Reuters by Lynn Adler entitled: Could TARP smother, not shield, U.S. housing?

“The U.S. government’s plans to sop up soured assets from shell-shocked banks to reignite lending could have an unintended consequence: raising mortgage rates and deepening the housing crash that touched off the crisis.

Average fixed 30-year mortgage rates rocketed nearly half a percentage point higher last week, their biggest one-week spike in more than five years, to 6.47 percent, according to the Mortgage Bankers Association.

The rates galloped higher as investors dumped U.S. Treasuries ahead of what they fear will be a flood of government debt to pay for the bank rescue program. That drove up yields on the securities used to peg mortgage rates.

Economists question how quickly TARP, or the Troubled Asset Relief Program, will have the intended result of freeing up banks to extend more loans and whether it will lower costs.

“The jury is still out,” said Greg McBride, senior financial analyst at Bankrate in North Palm Beach, Florida. “It could just as easily go the other way, with all the concerns about additional debt issuance by the Treasury actually pushing Treasury yields and mortgage rates higher.”

Analysts cite other factors that could drive up home loan rates for some time, including an unusually large gap between 10-year Treasury yields and 30-year mortgage rates and the near record risk premiums demanded by investors on mortgage securities.

Nervous investors keep demanding lofty yields on mortgage bonds versus low-risk Treasuries, raising costs for mortgage lenders who pass along the increase to home buyers. 

The spread between the 10-year note and 30-year home loan has hovered around 260 to 280 basis points, at least 100 basis points above its typical level prior to the credit crisis, McBride said. In the new world of tight lending, the spread will stay over 200 basis points even after the crunch passes, he said.

“There are so many problems in fixed-income in general right now and I am not sure the mortgage market will benefit first,” said Adam York, economic analyst at Wachovia Corp in Charlotte, North Carolina.

“Bottom line: The government would like everyone to think it can just waive a magic wand, drive mortgage rates down, save the banking sector and return us to the happy-go-lucky, reckless lending days of 2005. But it can’t.”


The next and most brutal leg down in housing will be unstoppable if the 30 year fixed rate goes back above 7%.

You can bank on that one

Maybe that’s why the homebuilders have hit fresh new lows lately.

Confidence among U.S. homebuilders slid in October to the lowest level since record-keeping began in 1985. The National Association of Home Builders/Wells Fargo index of builder confidence decreased to 14 from 17 in September.

A reading less than 50 means most respondents view conditions as poor.