Though mortgage rates have cooled off recently, expect them to start inching up again soon and continue rising through the rest of the year.

Mortgage rates should steadily rise throughout 2011, reaching about 5.5 percent by year's end, according to the newest economics and mortgage market analysis from Fannie Mae, released Monday. Meanwhile, tighter lending standards, including higher fees for government-backed loans, will provide additional challenges for borrowers.

Although interest rates have drifted lower in recent weeks, as turmoil in the Middle East has driven investors toward bonds and other "safe" investments, Fannie Mae stills expects rates to begin trending up through the rest of the year. However, if the situation in Libya continues to drag out, or upheaval worsens in other oil-producing nation, rates could remain suppressed for some time to come.

Oil is a major issue clouding the economic picture, according to the report. Given that surges in oil prices have been associated with economic slowdowns over the past 40 years, sustained price increases linked to ongoing or worsening Middle Eastern crises could put the economic recovery at risk. That would likely keep interest rates down, but would probably stall out any rebound in the housing market as well.

However, Fannie Mae sees the most likely scenario being that oil prices will stabilize and even decline somewhat, so that the overall effects on the economy will be relatively minor.

Tighter lending standards are expected to present increased challenges for consumers seeking mortgages, including higher fees for FHA premiums. The insurance premium on FHA mortgages is scheduled to increase another 25 basis points (one-quarter percent) in April, for a cumulative increase of 60 basis points since last September.

The government's first steps toward winding down Fannie Mae and Freddie Mac are also predicted to have an effect on mortgage availability. These include a scheduled decrease in the maximum conforming loan limit late this year to $625,000, from $729,750 currently, as well as possible increases in fees for Fannie- or Freddie-backed mortgages.

Overall, the forecast calls for a relatively modest recovery in home sales, increasing about 7 percent this year, partially held in check by rising mortgage rates, though still remaining at relatively depressed levels.

Published on March 23, 2011