A few weeks ago, the Fed made an emergency rate cut of 75 basis points followed by another 50 basis point cut at their Jan 29th meeting. Mortgage rates plunged briefly but then turned and exploded higher in a climb that lasted several weeks and carried the 30 year fixed back up into the 6.25% range. Consumers were confused, and many lost out as they waited and hoped for rates to fall even further.

The 30 year fixed stands at 5.875% once again this morning as Bernanke�s testimony yesterday and the stream of economic data point to economy with the brake pedal mashed against the floorboard. With oil brushing up against $102 a barrel and the specter of inflation dancing gleefully on the horizon, the Fed still seems more concerned on balance about the recession that �we�re not in�, which tells you something about how bad things look to them.

Mortgage Rate Forecast

Rates are improving this morning, but don�t wait for them to plunge. This is just part of the weekly cycle of volatility that consumers will have to watch carefully in order to lock in a good rate. The driver for mortgage rates isn�t the Fed action, not the recession, not even liquidity; it�s all about risk.

Forget about watching the 10 year Treasury for clues about mortgage rates. The correlation that existed was due to the fact that investors thought mortgage back securities and the U.S. Treasury 10 yr Note held about the same amount of risk. Guess what they think now.

It was another violent tug of war for mortgage rates last week. Renewed inflation concerns tugged hard on one end of the rope and recession anchored the other. Freddie Mac checked in with their weekly survey, reporting average 30 year fixed rates at a little over 6% with .6 points.

For that same half point, note that you can now get a 5/1 arm at 5.32%. The yield curve has steepened again as the short maturities respond to the Fed cuts and the long end stubbornly refuse. This 5/1 arm is not junk, it�s a A paper loan that makes a lot of sense for those shorter expected holding periods on their homes. The difference in rate could save you $10k over 5 years. Keep it in mind.

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As if tumbling real estate values, toxic loans, and rising foreclosures weren�t bad news enough, banks have begun freezing Home Equity Lines of Credit (Heloc), depriving homeowners the ability to draw on their remaining home equity when many need it most.

In recent years, the banks promoted Helocs by offering them like a free Happy Meal to consumers when they purchased or refinanced a home. Buying into the idea that a heloc could provide a safety net during difficult times, consumers often accepted.

ARE WE LAZY, OR IS THERE TOO MUCH FINE PRINT?

In its primer entitled What You Should Know About Home Equity Lines of Credit, the Federal Reserve Board notes:

Plans generally permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to draw additional funds during a period in which the interest rate reaches the cap.

But if anyone bothered to read the fine print or noticed the Fed�s warning, few anticipated the perfect credit storm in which we now find ourselves.

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