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Rise in Mortgage Rates No Surprise

Mortgage rates hit their highest levels since January this week as the Federal Reserve stopped buying mortgage-backed securities, but there's reason to think the housing market will be okay.



) -- It was bound to happen.

On Thursday, just a day after

Federal Reserve

ended its $1.25 trillion mortgage-buying spree,

Freddie Mac


gave the first major signal that the housing market could face further impediments. Freddie's weekly survey showed a sharp climb in mortgage rates, with the price of a 30-year fixed mortgage hitting the highest level since January.

But investors should take pause before concluding that the nascent housing-market recovery will be torn asunder.

First, it's worth pointing out that the Fed's move isn't wholly responsible for the rise in mortgage rates. The central bank has been gradually winding down its mortgage-backed securities purchases for several months, and the coming end was widely broadcast. The climb had more to do with the recent spike in Treasury bill yields, which are struggling to regain investors who jumped into riskier waters.

Equities have risen in recent weeks, as have junk bonds, which reached a record issuance of $38.3 billion for March and $61 billion for the quarter. A

report this week that investors are moving back into the private-label mortgage-backed securities market for the first time, literally, in years also debunks the theory that no one will step in to fill the Fed's shoes. The spread between mortgage rates and Treasurys remains at a historically low level, suggesting that mortgage rates are tracking the broader market, not just the end of the Fed program.

If anything, investors appear to be itching to get back into mortgages, which have been dominated by the Fed, Freddie,

Fannie Mae

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and other government-backed agencies for over a year.

From a borrower's point of view, mortgages are still cheap. The weekly jump in rates ignores the longer-term trend line, as well as huge changes to

mortgage-workout programs to further stabilize the market. Ultimately, the main hindrance hasn't been an issue of


, but underwater borrowers' lack of incentive, and unemployed borrowers' lack of ability, to pay anything at all. Treasury Secretary Timothy Geithner's statement on Thursday that the 9.7% jobless rate will remain "unacceptably high" for a long time did little to dispel that reality.

Although it wasn't a profitable business, the hemorrhaging stopped for big banks in the mortgage space last year. Fees surged due to the refinancing wave and smart hedging for some on mortgage-servicing rights. Yet credit write-downs and charge-offs tended to net out the gains.

For instance,

Bank of America

(BAC) - Get Bank of America Corp Report

, the country's largest mortgage servicer, took in $9.3 billion worth of mortgage-banking income last year, but faced an $11.2 billion provision for credit losses. Its home loans and insurance division posted a net loss of $3.8 billion.

Wells Fargo

(WFC) - Get Wells Fargo & Company Report

, another huge player in the mortgage space, brought in $12 billion worth of mortgage-banking income in 2009. Its provision for credit losses - which also includes bad commercial debt - was $21.7 billion. It's difficult to parcel out what portion of the provision was attributable to Wells' mortgage-banking division. But with mortgages accounting for 55% of its loan book in 2009, if the bank eked out a mortgage-banking profit, it was probably minimal and largely attributable to an aggressive

hedging strategy.

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. Report

posted $3.8 billion worth of mortgage-banking income from its retail banking division, but also recorded $15.9 billion worth of credit loss provision. You get the picture.

As a result, banks have seen a light at the end of the tunnel, but realized they must do more to reach

that end. They recently began extending not just refinancing offers with lower rates, but deals to cut principal or accept interest-only payments for a period of time, in an effort to solidify the bottom.

So what does all of this mean for the housing market, and related bank profits? They'll take more than a week to recover.

-- Written by Lauren Tara LaCapra in New York