Long-term rates are stuck. After a November scare at 4.65 percent, the 10-year T-note has stayed within a whisper of 4.5 percent, which in turn has kept low-fee fixed-rate mortgages close to 6.25 percent.

Short-term rates will continue their grinding rise on Tuesday when the Fed goes to 4.25 percent. “Prime” will go to 7.25 percent — mechanically 3 percent above Fed funds. Home equity lines of credit all float with prime (big lines and good credit float slightly under prime; small and/or shaky, 1 percent or 2 percent over), as do all construction loans (rarely as little as .5 percent over prime; usually 1 percent or more over).

Adjustable-rate-mortgage (ARM) indices will rise in two broad groups: quick-reacting and lagging. The 1-year T-bill index will move toward 4.5 percent this month, and one-year LIBOR close to 5 percent; the laggers, COFI and MTA (both weighted averages of rates 12 to 18 months back), will rise to roughly 3.15 percent and 3.6 percent, respectively.

ARM “margins” (margin plus index equals borrower pay or accrual rate) vary by product and index, but the January payment notification for quick-reacting ARMs will say 7 percent or higher. The laggers will go to a range of 5.5 percent-6.5 percent in January, but even if the Fed stopped raising its rate on Tuesday, these lagged-index ARMs will continue to rise during 2006; by summer, all ARMs will be north of 7 percent.

The Fed will not stop raising its rate on Tuesday; a move to 4.5 percent on Feb. 1 is a sure-money bet, and the Fed-funds-futures market places 4.75 percent on March 28 a 50-50 wager. The race is on. At what point will 7 percent…7.5 percent…8 percent…8.5 percent…ARM, HELOC and construction loans trip the housing market?

Soon, says here. Very soon. I know that these rates are not historically high, and that fixed-rate money is still cheap, but they are double the rates prevailing a year ago. Crystal-balling aside, voices tell me that these rates are already doing significant harm.

Not the voices in my head; the ones on the phone. The first-time buyer last week, a fine-credit, ICU RN, was stunned to find that an ARM would do nothing to add to her purchasing power or payment comfort. Then the spec-home builder on Wednesday…incensed that his two best banks were trying to gouge him, telling him construction money would cost 8 percent, maybe 9 percent by summer — followed by dead silence and a dropped project when he understood that those are the real-world numbers.

It was very nice of Federal Reserve Board Chairman Alan Greenspan to send all of us one last holiday card. Instead of “Best Wishes,” this one has a lovely dove, its beak holding a banner reading, “Good Luck — You’ll Need It.”

Responding to the (excellent) questions of Jim Sexton, chairman of the House Joint Economic Committee (full text at www.house.gov/jec/), Greenspan opened by saying, “It is impossible to know with any certainty when the neutral [Fed funds] rate has been reached.”

I have tremendous respect and thanks for Greenspan; however, I confess some frustration that we have spent the last 18 months anticipating his announcement that the Fed had reached neutral, and would then stop hitting us. He said last year that he would know neutral “when we get there,” but now says uh-uh.

Greenspan then offered six separate reasons why long-term rates are lower than they should be, followed by a marvelous evasion on the predictive power of flat and inverted yield curves, and concluded with a thought on transparency of Fed policy: “Tell ’em nothin’.”

He won’t say, but I will: for the first time in Fed history, given the refusal of long-term rates to rise, the Fed will slow the economy entirely by raising short-term rates, and nobody knows how high they may go nor how sudden the damage may be.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.


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