Bernanke Says Mortgage Rates Headed Higher: Ignore Him

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Federal Reserve Chairman Ben Bernanke recently warned of rising mortgage rates. But when you take a closer look at the testimony, he's referring to a couple years down the road -- probably closer to 2012 than 2010.

In his April 27 testimony before President Obama's federal deficit committee, Bernanke expressed concern about the annual deficit through 2020, which could lead to a ratio of federal debt to GDP of 70 percent by 2012. And that could start to raise concerns among investors.

Under a worst-case scenario: If tax cuts are extended, the deficit by the end of 2020 could be 9 percent of GDP and the federal debt would "balloon to more than 100% of GDP." At that point the U.S. would definitely be paying higher interest rates to borrow money and that would likely lead to higher mortgage rates.

But remember, that's not going to happen anytime soon.
In fact, in recent testimony, Ben Bernanke told the U.S. Congress Joint Economic Committee that at the end of the Fed's $1.25 trillion purchases of mortgage assets, it "appears to have improved market functioning and reduced interest-rate spreads not only in the mortgage market but in other longer-term debt markets as well."

That indicates a strong likelihood for continuing low mortgage rates.

The Federal Reserve maintained interest rates at all time lows at the end of today's Federal Open Market Committee (FOMC), so you can count on mortgage rates staying in about the same ballpark for months to come. While the FOMC concluded that the "growth in household spending has picked up," the economy "remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit."

In other words, the economy is still struggling and the FOMC gave no signal that it intended to raise the federal funds rate above the current 0 to 1/4 percent target range. In fact the FOMC expects current economic conditions to remain "subdued" and said that with "stable inflation expectations" the federal funds rate will remain at "exceptionally low levels" for an "extended period."

In the area of housing, the FOMC said, "Housing starts have edged up but remain at a depressed level." So if you're worried about interest rates going up, don't.

Some were concerned that the mortgage rate would go up when the Fed stopped buying mortgage assets, but those fears appear to be unfounded. In fact just the opposite appears to be happening now that private mortgage insurers are back in the game. That should encourage even more private investors to get back into the mortgage market as well.

You'll more likely see improving conditions for home purchase loans, now that private mortgage insurers are insuring loans with as low as 5 percent down in most markets. You won't see those favorable rates in the depressed markets right away, but as the economy improves you'll find them there as well.

Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.
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