Fed Plan to Stop Buying Mortgages Feeds Recovery Wor

The Federal Reserve's pledge to stop buying mortgages by the end of March is sparking fears among home builders, mortgage investors and even some Fed officials that mortgage rates could rise and knock the fragile housing recovery off course.

Home-mortgage rates have risen by about a quarter percentage point over the past month. Here, an unfinished home in Raleigh, N.C., in November.
Rates on 30-year fixed-rate mortgage have risen by a quarter of a percentage point in the past month to around 5.2%, according to HSH Associates, near their highest levels since September as the bond market has pushed up long-term interest rates amid signs of an improving economy.

The recent rise in mortgage rates could be a prelude to even bigger increases in coming months as the Fed steps away from support for the market. That prospect has some in the markets counting on the Fed to change course and keep buying past March, which many officials are reluctant to do.

When such a big investor stops buying, "that could lead to material increases in [interest] rates across the board," said Ronald Temple, portfolio manager at Lazard Asset Management. He sees mortgage rates rising by a percentage point when the Fed stops buying. A withdrawal of government support, combined with high unemployment and rising mortgage foreclosures, could push home prices down 20%, he said. (more)