Mortgage Rate Forecast

Current interest rates are holding steady, but daily pressure to keep mortgage rates low is wearing thin because of today's weak-dollar economy. Most experts agree that it's not a question of if-but when-today's rates will rise.

Interest rates were pared down to the bone earlier in the year, as the Fed freed up capital to encourage banks to lend. But despite the best intentions of those low underlying rates, most banks failed to pass along discounts to consumers, because they couldn't afford to offer rate cuts while suffering ongoing daily losses from loan defaults.

Trouble at Fannie, Freddie, and GM

Fannie Mae and Freddie Mac, the country's two largest mortgage companies, are both on the verge of collapse. The twin agencies handle about half of all current mortgages in the U.S. and, in August, they both reported losses that were more than three times greater than analysts had expected. They also slashed their dividends, and indicated that the worst is yet to come. In the auto sector, General Motors, once the giant of Detroit, reported losses of about $11 per share, despite the fact that the company's stock sells for only around $10 a share, near its lowest price of the year.

One reason for GM's losses is the weakness in the dollar. This means that Americans pay more for cars and fuel; but it also makes it more costly for domestic automakers to buy materials from overseas. The same is true for a variety of consumer items and commodities and, as a result, intense pressure is mounting for the Fed to raise current interest rates by a substantial amount in order to bolster the dollar and curb inflation.

Future of current mortgage rates

The Fed is in a bind. If it raises today's rates, it will put the brakes on economic growth. People won't be able to afford the best mortgages, businesses will be prevented from borrowing the money they need, and a recession will likely follow that will be long and painful. But with only a couple of points to cut before hitting zero, and the dollar wasting away to nothing, it's extremely unlikely that the Fed will lower daily rates. Doing nothing is the best plan for today, but anyone who has ever been on a sinking ship knows that doing nothing is a losing proposition.

What the Fed will probably do is hope for any signs of traction in the shaky economy, interpreting even not-so-bad news as the best news in a long time. Then it will start hiking rates, while everyone kicks and screams. If today's mortgage rates go high enough, it will wring out the current ugly excesses in the real estate market once and for all, so that the housing market can find its legs. The downside risk is that by the time those wobbly legs are steadied and the market gets its "sea legs," the ship will have already sunk.