If you haven’t read the 2010 Mortgage Rate Outlook by HSH Associates then you should. Especially if you are considering buying a home or refinancing a mortgage this year. Their forecast neatly lays out a case for higher mortgage rates by year end.

The driving factor will be the Fed’s program of purchasing mortgage-backed securities. It’s set to come to an end on March 31. By industry estimates the Fed’s current hand in the market means that conforming fixed-rate mortgages are about three quarters of a percentage point (0.75 percent) below where they would be otherwise. How much rates can rise depends on how much private investors will buy into the mortgage-backed securities market and how strong their demand will be. Right now it’s anyone’s guess. That to me is enough of a case that mortgage interest rates will be on the rise.

Need another reason? Here it is: the Home-Buyers Tax Credit will expire in April 2010. When this credit first neared expiration, there was a flurry of home-buying activity and an uptick in demand for mortgages, causing mortgage rates to rise slightly. So if there’s another rush of buying to take advantage of the credit between now and April, this could also cause rates to rise.

Also, with some improvement in the economy, the Fed will need to start laying out a plan to remove some of the massive amounts of liquidity it’s been pumping into the system. To that end, the Fed already announced it’s raising the interest rate it charges on short-term loans to banks by a quarter point. As the mortgage market transitions from near complete government support to being supported more by the private market, there should be a return to “normal” mortgage rates.

All this means so long to the low rates we are seeing now, which have been the best rates in nearly 50 years. Mortgage forecasters think rates could increase by a half percentage point to a full point, which is a big increase from the near five percent rates we are seeing now.

Home buyers on the hunt for bargains should still be able to find them. There is set to be another wave of failed loans driven by job losses and some that will fail again after unsuccessful loan modifications. Also, another batch of pay option ARMs will hit their five-year “recast” mark this year — many of these folks will not be able to afford the increased mortgage payments that include all the interest and a small amount of principal, even at interest rates of three to four percent. The result of this continued wave of loan failures is more homes on the already over-supplied market. Buyers should expect to continue to find reasonable or even cheap prices for existing homes. But the only direction for mortgage rates from here is likely up.
By Ray Martin

Stock-index futures fell sharply late Thursday after the Federal Reserve announced it’s raising the discount rate it charges on loans to banks. The dollar rallied sharply, and the euro touched a nine-month low on the move, which market participants interpret as signaling the beginning of the end of the central bank’s extraordinary stimulus measures.

The Fed raised the discount rate to 0.75% from 0.5% in order to encourage banks to tap money markets rather than the central bank for short-term loans.

Futures on the blue-chip Dow Jones Industrial Average ($INDU) were off 65 points, or 0.6%, at 10,310 as of 4:40 Eastern time, while S&P 500 ($INX) index futures were off 9 points, or 0.8%, at 1,096. Action in the futures market is often — but not always — indicative of market direction during the regular session.

The U.S. Dollar Index, which measures the greenback against a trade-weighted basket of six major currencies, leaped as much as 0.7% on the news, a large move in currency terms.

In a statement aimed at market speculation that the Fed is finally changing the ultra-accommodative monetary policy it has maintained since the financial crisis struck, the Fed said: “These changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”

Still, it’s the first upward rate move from the Fed since the meltdown. It’s not likely to be the last.
By DAN BURROWS