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The long-awaited rate increases appear to have finally arrived as mortgage rates hit five month highs early today before retreating slightly. As we have been commenting for months, we believe this is the start of a gradual rate increase that extends well into 2010. We are currently quoting a rate of 5% on a 30-year fixed rate mortgage to a well-qualified borrower.

Here's the good news. The U.S. Treasury announced last week that it would provide an unlimited amount of assistance for the next three years to Fannie Mae and Freddie Mac. These are the embattled quasi-government mortgage agencies who own the majority of mortgage loans in the U.S. today and have been taking record losses. This is good news because the Federal Reserve (our central bank) has been artificially keeping rates down by buying mortgage backed securities (pools of mortgages made by lenders) since there have not been enough buyers in the market at current rates. Think of it this way. Too much supply and not enough demand for these mortgage securities means the prices fall, and rates go up. With Fannie Mae and Freddie Mac getting a longer leash from the Treasury, they might be able to step in and absorb some of the supply that will be abandoned when the Fed stops their buying at the end of the first quarter of 2010.

If the recent news of lower than expected jobless claims continues, we believe we will see higher rates next year, though we may see a stabilization in the 5.25% to 5.5% range if the government plans go as expected.

Stay tuned!