President Barack Obama has promised to lower mortgage rates for Americans, but that may be harder to achieve than it appears.

Since the start of this year, the Federal Reserve, in a bid to lower mortgage costs, spent some $70 billion to buy up mortgage bonds guaranteed by the federal mortgage finance giants, but mortgage rates recently have begun to tick up again.

It's a stark reminder of how intractable the problems are that markets face and highlights the limits of even the Fed's ability to restore normal conditions. Even as the central bank has pledged to buy $500 billion in mortgage bonds by June, equivalent to the year's expected net new supply, the mortgage market is grappling with its increasing dependence on, and the rising complications from, the Fed's involvement in the market.

For sure, the program has been successful in lowering mortgage rates: The 30-year fixed mortgage rate fell to as low as 4.875% from higher than 6% in November before the program was announced. But that rate has recently risen back to 5.34%, according to Bankrate.com, indicating the limitations of the Fed's actions.

Analysts say the Fed's buying may not be enough to push rates below a certain point, as other factors outside of the central bank's control put a floor under mortgage rates - from worries about rising supply pressuring Treasury yields higher to uncertainty over the duration of the Fed's support. On top of that, there is the lingering ucertainty over the future of Fannie Mae (FNM) and Freddie Mac (FRE), both of which are scheduled to get out of their conservatorship at the end of this year.

"The Fed is trying to keep a lot of balls in the air, and one wonders if it's possible," said Chris Aherns, a mortgage strategist with UBS.

 
   The Treasury Conundrum

Typically, the 30-year mortgage rate is based on the sum of the 10-year Treasury yield, the risk premium on mortgage-backed securities and bank fees and charges.

The Fed's intervention was targeted at lowering the risk premium on mortgage bonds over Treasurys and using this as a tool to bring down the total mortgage rate that homeowners pay. It has been successful to a degree: Average premiums have shrunk by 100 basis points to 180 basis points since the Fed announced its program late last year.

However, the increase in supply of Treasury issuance to fund the government's many support programs for the economy, including the mortgage plan, has pushed up yields in Treasury markets, negating some of the beneficial impact of the Fed's mortgage purchases.

For sure, the Fed has said it would consider buying longer-dated Treasurys, which would send government-bond yields lower again. But it is unclear whether the mortgage market would follow suit. The Fed itself said last week that it would only buy Treasurys if that move would be "particularly effective in improving conditions in private credit markets."

 
   Supply And Demand - Where Are The Buyers?

By entering the market, the Fed created demand for mortgage bonds, and as rates have fallen, the number of homeowners who could benefit from refinancing their existing mortgages has risen.

Rising refinancings, however, create new supply, and there is much concern about who would buy these freshly minted mortgage bonds - particularly if they carry lower yields. That could drive mortgage rates up again.

"Buying $500 billion worth of [mortgage bonds] seems like a lot, but it's not enough to absorb the potential supply coming into the market from refinancing activities, which are expected to climb even further with rates remaining at this level," said Sean Dobson, chief executive officer of Amherst Holdings, a boutique mortgage securities trader.

While the central bank has stated repeatedly that it would go beyond the $500 billion amount if needed, it's not clear that it wants to buy trillions of dollars worth of new bonds.

Traditional investors in these bonds, Asian financial firms, money managers and foreign central banks, all backed out of buying these securities since last summer and haven't returned, leaving the Fed as the largest buyer.

 
   Between The Devil And The Deep Blue Sea

There's still no clear strategy to prop up the crumbling housing market. Some argue that lower rates alone aren't a fix, as home affordability still remains an issue. Tighter lending standards have reduced the mortgage sizes available to prospective buyers.

"What that means is housing prices are going to continue to drop until they become affordable and that supply/demand imbalance passes," Dobson said.

Some suggest that the best option may be for the government to create an entity through which it could offer 30-year mortgages at preset rates of say 4% or 4.5%, as an incentive to draw in potential homeowners.

However, the issue with such a program again is the lack of investors.

"Not a lot of buyers are likely to want to buy 3.5% mortgage-backed security, so the government may end up being significant holder of these loans," said Nicholas Strand, a mortgage strategist with Barclays Capital. "And that number could run up to trillions of dollars."

-By Prabha Natarajan, Dow Jones Newswires, 201-938-5071; prabha.natarajan@dowjones.com

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