No. 4: Mortgage Rates

Five years after the housing market peaked, the obsession with mortgages rates went up, but the appetite for home ownership and home buying declined.

Throughout the year, existing home sales generally rose compared with 2010, although in the first 10 months of 2011, new home sales were off 6.9% from the first 10 months of 2010. Thanks to foreclosures, slower family formation, and the rising appeal of renting, the home ownership rate continued to decline in 2011, standing at 66.3% in the third quarter, down from the peak of 69% in the third quarter of 2006.

Major source of concern and anxiety
But that doesn’t mean people lost interest in their mortgages. After all, for those with homes, mortgages represent the largest single bill, a major source of concern and anxiety — and, in some instances, an opportunity to reduce cost in this age of muted income growth. What’s more, the mortgage market is the place where personal finance, government policy, Wall Street, and the larger economy meet. So, it’s no surprise that mortgage rates were one of the most frequently searched terms on Yahoo! in 2011.

Generally, mortgage rates remained low and trended lower through the year, with 30-year mortgages often heading toward the 4% market, as showed. The low headline numbers attracted a great deal of consumer interest. But the devil was frequently in the details. Many borrowers simply weren’t eligible for the low rates flagged in advertisements, especially if they had less-than-pristine credit or didn’t have enough equity in their homes. That continued to be a major sticking point, as housing prices continued to fall throughout 2011. Zillow reported that in the third quarter, some 28.6% of home owners were underwater on their mortgages, meaning the homes were worth less than the amount of debt resting on them.

Feeble government response
Policy questions also helped keep mortgage rates in the news. Since the housing market started to go south, the government response has generally been feeble. Mortgage modification efforts never gained much momentum. Of the $30 billion obligated under the controversial 2008 TARP legislation to finance mortgage modification, less than $2 billion was spent. That led to calls for dramatic action. In the fall, conservative economists like Martin Feldstein and Glenn Hubbard gained lots of attention for their calls for mass mortgage modification as a way to help the economy.

Meanwhile, almost every month, a new wrinkle in policy that affected mortgages and rates rolled out. Given the increased roles of Fannie Mae and Freddie Mac, the taxpayer-owned giants in the mortgage market, professionals and consumers had to keep tabs on their latest workings. In September, the Federal Reserve announced a new effort to boost the economy: Operation Twist. As part of the plan, the Fed said it would continue to buy mortgage-backed securities in an effort to keep rates down. In October, the Federal Housing Finance Authority, which oversees Fannie and Freddie, announced changes to its Home Affordable Refinanced Program, intended to make it easier for more borrowers to refinance. The changes included raising the maximum loan-to-value ratios of loans that could be refinanced.

Given the continuing problems and challenges in the housing industry, it wouldn’t be surprising to see mortgage rates pop up on the 2012 Year in Review list.

Daniel Gross is economics editor at Yahoo! Finance. Follow him on Twitter @grossdm; or email him. His most recent book is “Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation.”