Tomorrow, Fannie Mae will release the results from its weekly Primary Mortgage Market Survey (PMMS), which should show that average mortgage rates have risen above 5% for the first time since February. If last week’s spike in Treasury yields was any indication, mortgage rates are nearing a 2010 high.

Analysts (myself included) have been predicting this rise in rates for a while. In fact, it is only because of intervention by the Federal Reserve Bank, which has purchased more than $1.25 Trillion in Mortgage Backed Securities (MBS) over the last year that rates have remained this low for this long. It was always only a matter of time before the Fed would curtail its intervention, and the mortgage market would return to equilibrium. That moment has finally arrived: “We will see more volatility in MBS in [a] post-Fed purchasing world, particularly with the Fed not being a backstop buyer after next week,” summarized one analyst.

As if that were not enough, a fiscal crisis in the EU has caused investors to think twice about the sovereign debt of all countries that are operating in the red, including the US. With its Trillion-Dollar deficits, the US is making its creditors nervous, and the response has been a sell-off in Treasury bonds and rise in yields. Mortgage-backed securities trade at a spread to Treasuries, the long-and-short of which is that US fiscal problems have translated into a rise in mortgage rates.

That’s the story for fixed rates; what about variable rates? It turns out that the Fed plays an important role here as well. The Federal Funds Rate (FFR), which is set by the Fed, is currently at an all-time low of near 0%. That means that variable rate mortgages which are are tied to the FFR (and even some that aren’t) are incredibly cheap. As with the Fed’s asset purchase program, there will be an end to this period of record easy monetary policy. Fortunately for variable-rate mortgage borrowers, it doesn’t look like that end will come anytime soon. Based on interest rate futures, it probably won’t be until December (at the earliest) that the Fed finally hikes short-term rates, and even then, the pace of rate hikes will probably be slow.

Those with variable-rate mortgages will probably be tempted to wait until the Fed hikes rates before financing into a fixed-rate mortgage. And who can blame them! Still, you should bear in mind that when short-term (i.e. variable) rates finally begin to rise, long-term (i.e. fixed) rates will likely already have risen. While you might be able to squeeze out some short-term savings by waiting to refinance, you might ultimately end up paying more over the life of the mortgage, especially if you plan to keep it for the full 15-30 years.

If you currently have a variable-rate mortgage and are planning to move in the next 1-2 years, it probably doesn’t pay to refinance, since any interest rate savings will likely be offset by closing costs associated with the refinancing. For everyone else, you should think about refinancing at some point in the immediate future. It’s hard to time the market, and by the time you will actually close on the refinancing, who knows how high rates will have risen. Then again, maybe they will remain constant. It all depends on what you can afford and how comfortable you are with uncertainty.

There’s nothing that causes me greater irritation (or subsequently gives me greater pleasure) then reading blatantly erroneous financial advice in a major newspaper and then debunking it.

Recently, I read an article in the New York Times entitled “When Not To Pay Down A Mortgage,” in which the author, Ron Lieber, lays out the case for and against early repayment of your mortgage. He concludes that based on current interest rates and economic circumstances, it doesn’t make sense to repay it, because you can probably earn more investing your savings elsewhere. Still, he concedes that there is an emotional benefit to repaying your mortgage early and being debt-free.

Lieber makes some good points about how it’s clearly better to first pay off higher-interest debt, such is that associated with a credit card or home equity loan. Don’t be tempted to make extra mortgage payments in order to lower the duration of your mortgage without first paying down your credit card. He also urges readers that in the current economic climate, it’s very important to make sure that you have an adequate cash cushion in case of hardship, and that emergency funds clearly should not be used to prepay the mortgage regardless of your interest rate.

But here’s where Lieber goes astray. He repeats the classic mortgage fallacy which is that your real interest rate is less than your stated rate because of the mortgage interest tax deduction, which means that your hurdle rate (the rate of return that you would need to earn in order to make not prepaying viable) is much lower than you think. There is only some truth to this, but it depends on the type of investment account and the type of investment. If you use the funds (that you would have otherwise used to prepay your mortgage) to day trade, then you will be taxed on your earnings (or more likely your losses…) at your normal income tax rate, completely offsetting the interest tax deduction. The same is true if you invest using your Roth IRA, since you will necessarily have paid income taxes on all contributions to that account before they can be invested. Really, the only exception is that if you invest in stocks using your traditional IRA, you will be taxed at the long-term capital gains rate (15%), and can reap some benefit from the tax rate differential. Still, this assumes that (at current rates) you will need to average 4-5% a year simply to break even! Maybe you think that you can, but is the added risk really worth it? In this regard, the only way you really “beat the system” is if you contribute more funds to an employer matching 401K. Personally, I would have thought this was obvious, and that anyone with half a brain would have done this before prepaying their mortgage.

Lieber’s other argument is even more questionable: given how much housing prices have fallen, it doesn’t make sense to prepay your mortgage, because if you decide you want to walk away, it becomes even more costly. Of course, this is entirely true, but I have a hard time believing that a significant portion of borrowers obtain mortgages with the intention of breaking them when housing prices decline. I, too, am an advocate of walking away from your mortgage when it makes financial sense, but the idea of financial planning with this possibility in mind strikes me as ludicrous. Even in the current crisis, only a small minority of borrowers (~10%) will default on their mortgages. For those who are underwater, I’m sure that they regret every cent that they paid into their mortgage. But asking them to anticipate the position that they ultimately found themselves in and acting accordingly is unfair.

I think Lieber’s conclusions stand on their own. There is a strong emotional benefit to repaying your mortgage early, as long as you can afford it. While it’s possible that you will come out ahead by paying off your mortgage normally and investing in the interim, there is added risk and no guarantees associated with such a strategy.

One of the long-term upshots of the current housing crisis might very well be more attention paid to affordable housing.

During the boom, very little attention was paid to this critical issue because housing financing was so easy to obtain. It didn’t matter whether the underlying housing could still be considered affordable, because it could be financed. Never mind that many borrowers clearly couldn’t afford to make mortgage payments, since innovations in lending allowed them to roll the interest and principal they owed back into the mortgage.

The housing bust and mortgage crisis has exposed the hollowness of this system, as millions of homeowners default on mortgages that they couldn’t afford from Day 1. The government’s response to this has been predictable: help existing borrowers refinance or modify existing mortgages, and help new borrowers secure cheap and easy credit. As the crisis subsides, however, the government will have to shed itself of this crisis-mentality and focus on making housing affordable over the long-term.

In fact, there is already evidence that this is happening, as state and local agencies move to increase the stock of affordable housing, which is typically defined as housing that consumes no more than 30% of borrowers’ income. While jurisprudence varies, most localities have statutes that stipulate a fixed proportion (~10%) of the housing stock meet certain affordability tests. Until this ratio is breached, developers that incorporate affordable housing are supposed to receive priority. Sometimes, these new developments will consist entirely of cheap housing units, while others will include a mixture of subsidized (public or private funds) and market-rate units. As a recent case in Connecticut showed, localities that try to block affordable housing can face legal action.

The federal Department of Housing and Urban Development (HUD)is also expanding its efforts to fund more affordable housing through its three staple programs: “The HOME Program…provides grants to States and local governments…which use their HOME grants to fund housing programs that meet local needs and priorities….SHOP [Self-Help Ownership Program] provides funds for non-profit organizations to purchase home sites and develop or improve the infrastructure needed to set the stage for sweat equity and volunteer-based homeownership programs for low-income families…The Homeownership Zone program allows communities to reclaim vacant and blighted properties, increase homeownership, and promote economic revitalization by creating entire neighborhoods of new, single-family homes, called Homeownership Zones.” The latter program hasn’t been funded since 1997, but could be resurrected in the wake of the housing crisis.

If you want to apply for one of these grants, you should contact the nearest HUD office. If you think you might be eligible for private affordable housing, you must contact developers of specific projects, since they may have varying requirements and application procedures. You can start by doing a Google search for affordable housing.

By most measures, the national housing market appears to have stabilized. If not for government intervention, however, it’s unlikely that this would be the case. Summarized Yale economist and housing market guru Robert Shiller:  “ ’The rebound in the housing market since April seems to be related to these efforts’ ” that include a homebuyer tax credit and Federal Reserve purchases of mortgage-backed securities designed to hold down borrowing costs.” This begs the question: when government support dries up, what will happen to housing prices?

Government intervention programs in the housing market are numerous. Mr. Shiller mentioned the first time homebuyer tax credit and the $1.25 Billion in Fed MBS purchases. Acronyms abound, with the HAMP modification program and the HREF refinancing program. There was TARP, which directed cash to struggling banks so that they might step up mortgage lending. There is an ongoing initiative aimed at encouraging principal reductions and deeds-in-lieu of foreclosure, where appropriate. There is the government conservatorship that still encases Fannie and Freddie. There is the FHA, which now now insures more than 1/3 of new mortgages. There are the discretionary funds awarded to states to fund experimental relief efforts. And of course there is the mortgage interest tax deduction, which was in place well before the housing crisis, but is worth pointing out nonetheless.

There are a few key threats to all of these programs. The first is one of financing: they are expensive to operate, and it’s unlikely that they will pay for themselves, despite the government’s insistence. The second issue is efficacy. The modification program, for example, has helped only a handful of eligible borrowers, and hurt many more by simply delaying foreclosure. Meanwhile, new evidence suggests that the interest tax deduction does nothing to spur home ownership. Finally, there is the issue of whether these programs are even producing outcomes which are desirable. “I don’t see anything being gained by holding housing prices higher than the market rate. It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes,” Dean Baker recently told reporters. In short, it looks like time is running out.

The Fed has essentially stopped purchasing MBS, although it is currently debating whether to resume doing so. The homebuyers tax credit was renewed once, but is unlikely to be renewed again when it expires in May. The modification program is still alive, though generally acknowledged as a failure, and it could be completely closed soon. High default rates already threaten the solvency of the FHA, and despite premium increases, it may have no choice but to cut back on lending. Fannie and Freddie are safe until 2011 (according to Treasury Secretary Tim Geithner) although Congress has already indicated that they will be abolished. As for the mortgage interest tax deduction, the housing crisis revealed how counter-productive it was, and it could be one of the first things to go when the federal government gets serious about fiscal responsibility

So there you have it. The government clearly wants you to buy a house now! It will subsidize the purchase, facilitate the financing process, keep borrowing costs reasonable, and help you make payments if you get into trouble. Why wait, right? On the other hand, when the government pulls the plug, the bottom could fall out of the housing market. In which case, that FHA loan and $8.000 tax credit might start to look like a booby prize.

With interest rates at record rthlows and FHA mortgages in vogue, this question has never been more pertinent. Simply, assumability is a clause in a mortgage that allows it to be transferred from one borrower to another. In other words, when the original borrower sells the home, he can transfer the mortgage to a new borrower instead of repaying the mortgage.

You’re probably wondering, Why would anyone want to do that? That’s a fair question, since the new borrower will still have to past muster, and the lender won’t sanction the loan assumption unless the new borrower’s credit score is comparable to that of the original borrower. Still, there are two key benefits. The first is that the new borrower can save on closing costs (though there are a handful of small fees) by not having to obtain a new mortgage. More importantly, the new borrower is subject to the original mortgage rate, a lucrative perk if interest rates have risen over the interim. In return for this benefit, mortgages with assumability clauses typically carry slightly higher initial interest rates or require private mortgage insurance.

It is important to understand the three types of assumability, since they are not created equal. An assignmentof a mortgage transfers the obligation to repay, but the original borrower is still on the hook if the new borrower defaults. With a subject-toassumption is similar to an assignment, the original borrower is also responsible for any deficiency judgements (i.e. second mortgages) in the event of default. A novation transfer absolves the original borrower of all responsibility even if the new borrower defaults. Unlike an assignment and subject-to transfer, a novation is the only kind of assumption that doesn’t carry risks for the original borrower.

Generally, assumability clauses are only present in FHA and VA loans. It doesn’t hurt to ask your lender if it can be inserted into your loan, but in practice, most lenders would be reluctant to do so. Still, it’s worth understanding the trade-off with assumability. As long as interest rates have risen (enough to offset the PMI premiums) when you sell your home, then assumability will inure to you as a net benefit. Over time, however, the value of assumability decreases, as home-price appreciation and a decline in your mortgage balance make it unlikely that a new borrower will be able to afford to assume your loan. Ultimately, if your loan is assumed, the benefits will be shared between you and the original borrower.

Without introducing precise numbers, suffice it to say that the sweet spot for assumability is probably between 3 and 7 years. As one expertsummarized, “Short of three years, it is not clear that interest rates will be significantly higher than they are today, and after seven years, it is not clear that assumability will have significant value to home buyers.”

On April 5, the federal government’s latest effort to address the mortgage crisis kicks off. Known as Home Affordable Foreclosure Alternatives (HAFA), it basically stipulates that lenders have two main options for dealing with bad loans. Either they offer the customer a loan modification, or they agree to a short sale / deed-in-lieu of foreclosure. While lenders are crafty and will certainly find a way around the requirement, it’s important that borrowers understand their rights.

So what is a Deed-in-Lieu of Foreclosure? For borrowers who are behind on their mortgages, it represents an opportunity to avoid outright foreclosure. Basically, a borrower signs over the title (the “Deed”) to his home to his lender, and in return is supposed to receive a cancellation of his debt. For those borrowers with underwater mortgages (the mortgage balance exceeds the market price of the associated property), this is an incredible benefit, since it essentially allows them to walk away from their mortgages and leave the bank with the balance. However, it is also beneficial for delinquent borrowers whose mortgages are not underwater, since the deed will probably result in a higher sale price (and more leftover equity for the borrower after repaying the bank) than if the property had slipped into foreclosure.

You’re probably wondering: If this is the case, why would any sane lender make such an agreement? The answer is that foreclosure is costly, complicated, and just plain annoying. It can take six months (and even longer) for a foreclosure to be completed, from initiating proceedings to evict a delinquent borrower and sale of the property. During that time, the lender receives nothing from the borrower, and must in effect, pay property taxes and utilities itself. In addition, many spiteful borrowers will deliberately fail to maintain the property or even vandalize it, while waiting to be evicted.

In short, lenders have come to the conclusion that a Deed-in-Lieu will actually save them money, especially if a foreclosure is imminent. In fact, this realization is behind a new Citigroup program which provides for the borrower to live in the home for six months free-of-charge, and then offers them $1,000 in “relocation assistance” as long as the property is in move-in condition. Wells Fargo has a similar policy. Anyone with a Fannie Mae loan, meanwhile, has the right to remain in the home for up to one year following a deed-in-lieu agreement, and must pay market-rate rent (which is presumably lower than their mortgage payments were).

There are a few downsides to signing a Deed-inLieu. As with a foreclosure, your credit will be severely impacted, and you won’t be able to obtain a mortgage for at least a couple years. In addition, a handful of states have laws which allow lenders to go after borrowers for the remaining balance when an underwater mortgage is involved. Thanks to recent legislation, however, there are no longer significant tax consequences associated with the cancellation of a (underwater) mortgage, but as with any aspect of the tax code, certain conditions must be met.

Since a Deed-in-Lieu agreement must be entered into voluntarily, most lenders will not initiate one for fear that it makes it look like they are pressing to take control of a property. Thus, if you think you are eligible for, and would benefit from a Deed-in-Lieu, you should speak to your lender, and make it clear that you are doing so voluntarily. You can also cite HAFA if you think it would help.

Generally, the news media focuses on one number when reporting on mortgage rates: the Freddie Mac PMMS national 30-year fixed rate (which this week, happened to be 4.97%). This number is far from the whole story, however, and there are a handful of rates for other products and specific regions that I wish to expand upon below.

The first distinction is between 30-year and 15-year mortgages, which is significant both in form and in pricing. The average rate for a 15-year fixed is 4.33%, which is an incredible .64% higher than the equivalent 30-year rate. 15-year mortgages carry additional savings, since interest is accrued over a shorter time period. These savings are not insignificant and could easily total $100,000 or more over the life of a modestly-sized mortgage. On the other hand, the monthly payment associated with a 15-year mortgage will be higher, which means that your income ratio will also be higher, and the maximum size loan that you can obtain will be smaller.

The next distinction is between variable and fixed rate loans. Again, the disparity is not insignificant. While the full gamut of variable-rate mortgage products spans dozens, or even hundreds of different types, there are two that Freddie Mac monitors: Five/One-year variable rate and one-year variable rate. The 5/1 variable rate is actually a hybrid loan, and involves paying a fixed-rate for the first five years and a variable rate thereafter. The national average 5/1 variable rate is 4.11%, with an average margin of 2.75%, which is added on to a benchmark shot-term rate to determine the variable rate.

The average one-year adjustable rate mortgage rate is 4.27%, which is what you would pay not only for a variable-rate mortgage, but also what you could expect to pay after five years of having a 5/1 variable rate mortgage. In practice, many borrowers will refinance the mortgage within five years to avoid the uncertainty associated with variable rates. That’s because while short-term rates are currently low, they are projected to rise within the next 1-2 years, which would cause variable rates to rise proportionately. There is an inherent risk in any kind of variable rate mortgage, which is that you won’t be able to refinance if/when variable rates rise. The other risk is that fixed-rates could rise even faster, in which case it would have been more economical if you had taken out a fixed-rate mortgage in the first place. Of course, if variable rates remain low, then you may come out ahead. It is a gamble, and the decision depends largely on your comfort with risk/uncertainty.

The final distinction is regional, since mortgage rates vary across the country, sometimes by as much as .5%. Chances are, however, that this factor is beyond your control, as very few people would deliberately purchase a home in another part of the country merely because mortgage rates are lower! Besides, since mortgage rates are all derived from the prices for mortgage-backed securities – a national securities market – differences in rates are often offset by differences in points, so that the APR is ultimately the same.

Predicting mortgage rates going forward actually involves two separate predictions. Fixed rates are generally coordinated with long-term interest rates, and typically trade at a spread to Treasury Bond rates. Over the past 12 months, the Federal Reserve Bank has deliberately engineered a decline in fixed rates, through the purchase of $1.25 Trillion in mortgage-backed securities. These purchases, however, are slated to come to an end in April, at which point fixed rates could begin rising gradually, ending the year closer to 6%. If the Fed renews its purchases as some analysts expect, this would keep rates low, around the current 5% level. The Fed also has a role in determining variable rates, which are determined indirectly from the Federal Funds Rate. The Fed Funds rate has been set at .25% – a record low – for more than a year, and there is no consensus as to when the Fed will lift it. Futures prices indicate that a .25-5% hike before the end of 2010, but that is more of a guess at this point.

For the time being, then, both fixed and variable rates will probably remain low, though both could rise without warning at any time. Keep this in mind if you are considering a home purchase that would require a mortgage.