Many in the lending industry have predicted that 2002 will be a record year for mortgage loan originations because of hopes for expanded economic growth next year along with lower interest rates. How low? Some have been talking about mortgages in the mid 5 percent range. That's right. Five percent. But have you looked at mortgage rates lately?

Mortgage rates have skyrocketed in November to levels not seen since last summer. In fact, the 30-year mortgage rate of this writing is about 5/8 to 3/4 percent higher than just about four weeks ago. That translates into almost $100 more per month for a $200,000 30-year fixed rate loan. Or $12,000 over the next ten years. What happened? Hasn't the Federal Reserve cut rates 11 times in 2001?

First, remember that the short-term Funds Rate and Discount Rate controlled by the Fed have little, if anything, to do with long-term fixed-rate mortgages. They're designed, among other things, to be a stimulus to the economy by making it less expensive to borrow money in the short term. But now there is a perception that the economy will soon turn around and that stock values will generally go higher. As a result, investors are buying stocks now in expectation of higher values. Of course this is all theory: whether shares values will rise generally, or whether the value of a particular company will rise in the future, cannot be known in advance.

If investors are putting money back into the stock markets, they're probably taking that same money from some other investment. Usually that means from safer fixed instruments such as treasury bills, treasury notes and mortgage backed securities.

Of late, there's been quite a bit of selling of these traditionally lower-yielding investments. When there are fewer buyers of a fixed note, the sellers have to lower the price of that note to attract buyers, which also increases the yield on that note.

In other words, suppose a $1,000 note pays 5 percent interest. If investors bid up the price of the note to $1,100, the value has increased but the interest rate remains 5 percent of $1,000 or $50. And $50 per year is equal to an interest rate of 4.545 percent for an investment of $1,100.

Conversely, imagine that the note price falls to $900. There is still a $50 annual payment. An investor who acquires this note for $900 will earn 5.556 percent.

When investors generally switch from bonds to stocks, bond values fall -- and yields rise. When investors flee the stock market and look for safer investments such as bonds and notes, prices rise and yields decline.

The bottom line: Mortgage rates reflect the price movements of notes and bonds, especially 10-year debt instruments. Why 10 years? Because that's about how long many mortgages remain outstanding as people move or refinance.

Higher yields mean higher mortgage rates. In fact, the 6% Fannie Mae mortgage bond has lost nearly 200 basis points since early November. And it appears that the record low rates we saw early last month are in our rear view mirror. While no one can predict where rates are headed, if current trends hold and investors see light at the end of the stock market tunnel then we will indeed see higher mortgage rates over the near term.

If you've been waiting and floating your current mortgage refinance application, it might be prudent to re-evaluate the decision to refinance.

If rates have increased by as much as 3/4 of a percent and you're hoping they'll go back down, well, good luck. And I really mean that, I hope they do go back down. Sort of.

Remember, that if rates move back down or go below recent record levels, that also means that our economy is still anemic, and investors are pulling money out of stocks. And aren't we really ready for a recovery?

For more articles by David Reed, please press here.

Published: December 21, 2001

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.