Homeowners Put Off by Surge in Mortgage Rates

May 30, 2009 — -- The sudden spike in mortgage rates this week could derail the fragile improvements that were under way in the housing market, as homeowners and first-time buyers returned to the market to take advantage of mortgage rates that had dropped as low as four and a half percent.

Now, a lot of that activity has simply stopped.

At JBL Mortgage in Millerville, Md., this week, the phones were almost silent. Brian Blonder, JBL's CEO, said that after mortgage rates spiked Wednesday, "those phone calls just stopped."

When JBL was offering mortgage rates around 4.5 percent back in March, the staff was fielding up to 50 calls a day. Today, they're lucky to receive three.

According to Freddie Mac, the average rate for a 30-year fixed mortgage jumped to 4.91 percent this week. That's up from 4.82 percent just a week ago. At some lenders, rates shot even higher, increasing as much as 1 percent.

The jump in mortgage rates came as the yield on the Treasury's 10-year note -- a key benchmark for home mortgages and other kinds of loans -- reached the highest level it has been since November.

Economists said that the concern for the positive signs that had been seen in the economy recently is that rising bond yields could not only continue to push mortgage rates higher, but that it might also raise the cost of borrowing for businesses.

The surge in mortgage rates has effectively slammed the brakes on what was an avalanche of refinancing. According to the Mortgage Bankers Association, applications to refinance dropped 18.9 percent this week.

Some cash-strapped homeowners say they are worried that they've missed their chance to save a bundle.

Homeowner Karl Wenz said he had planned to refinance, but now he said he thinks he might have waited too long.

"I was going to save $325 a month, and that covers all kind of things, from gas to groceries," he said. "$325 is a lot of money."

And economists fear that without those savings from refinancing, one of the main engines for a recovery in consumer spending is now in jeopardy.

"This big increase in mortgage rates is something that will keep us awake at night," said Mahesh Swaminathan, a mortgage strategist for Credit Suisse.

He said he hopes that the federal government will act soon to drive mortgage rates back down.

The Federal Reserve has already spent a fortune trying to drive mortgage rates down, buying $481 billion in mortgage-backed securities to try to revive the nation's housing market.

But some economists believe that this week's spike in mortgage rates is a sign that investors expect the Fed to do more. Anxious mortgage brokers -- and eager homeowners -- will be nervously waiting.

"I do think they will act at some point," Swaminathan said. "Hopefully relatively soon."

Mortgage brokers ABC News spoke to said they have a lot of clients waiting on the sidelines, some who had been waiting for rates to fall even lower before refinancing.

Those brokers said that if mortgage rates do fall below 5 percent again, there could be another big wave of refinancings, including homeowners grateful for a second chance to take advantage of unusually low rates.