Will a Jump in Mortgage Rates Kill the Recovery?

My colleague Dan Indiviglio does a nice job of explaining what might happen after today, when the Fed ends its $1.25 trillion program to buy mortgage-backed securities. As Dan explains, the old thinking was "mortgage rates will jump." The new thinking is "wait--they might not." So far they have not. Whether or not they do is a question that concerns more than just potential home buyers. If mortgage rates jump, it becomes more expensive to buy a house, and home prices have just barely begun to stabilize. Higher rates put downward pressure on home prices. So, too, will the looming expiration of the home-buyer's tax credit. That means more homeowners underwater on their mortgages, more foreclosures, and more pain. Higher rates will also hurt those with adjustable-rate mortgages about to reset (one benefit to the historically low rates of the last year or so is that these resets, while damaging, have not been nearly as devastating as they could have been). That would cause further defaults and potentially plunge the country back into recession.

In a recent interview for this piece, I asked Tim Geithner whether this prospect worried him, and if it did, what he might do about it. He replied that it did, indeed, concern him. But he added--correctly--that the program fell under the Fed's purview, so there wasn't anything he could do (at least officially) to extend it or revise it. Given the administration's repeated failure to stem the wave of foreclosures, Geithner had better hope rates don't jump.