A decline in mortgage bond prices is raising interest rates on U.S. home loans, even for borrowers least prone to default.

The average rate on a 30-year, fixed mortgage rose to 6.37% this week, about the highest in six years, as yields on bonds guaranteed by Fannie Mae and Freddie Mac rose nearly to their highest since 1986 relative to Treasury bonds.

Higher rates for the safest borrowers may worsen the weakest housing market since the Great Depression and thwart efforts by Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to bring mortgage rates down. The slowest-growing economy since 2001 is already shutting out some buyers and increasing costs for those seeking to borrow with smaller down payments or low credit scores.

"New homebuyers are going to have to get credit at reasonable terms for the decline to stop," said Christopher Mayer, a real estate professor at Columbia University's business school. "The price issue alone is having a very big effect."

As rates rise, sellers are forced to reduce prices for buyers seeking to minimize their monthly payments. A rate of 6.37% would mean a monthly payment of $1,871 on a $300,000 mortgage, up from $1,739 when the average was as low as 5.69% in May, according to data from Bankrate.com.

Applications for mortgages fell 34%, to the lowest level since 2000, in the week ended Aug. 15 from a year earlier, partly because of the rise in loan rates, according to the Mortgage Bankers Association.

Investors are demanding 2.03 percentage points more in yield to own Fannie's current-coupon, 30-year, fixed-rate mortgage securities rather than 10-year Treasuries, according to data compiled by Bloomberg News. The spread reached a 22-year high of 2.37 percentage points in March, before narrowing to 1.52 percentage point on May 20.

About $4.5 trillion of so-called agency mortgage bonds are outstanding, compared with $4.8 trillion of Treasuries. Agency bonds, those guaranteed by Fannie, Freddie, or the Government National Mortgage Association, accounted for 94% of mortgage securities issued in the first half of this year, up from about 50% a year earlier, according to the newsletter Inside MBS & ABS.

Yield spreads on agency mortgage bonds narrowed in March after the Federal Reserve backed the rescue of Bear Stearns Cos. by JPMorgan Chase & Co., which showed that the government would act as a backstop against the failure of a large bank.

Spreads widened in the past three months as banks reduced their purchases of the bonds after taking writedowns and credit losses aggregating more than $500 billion. This depleted capital at banks and brokers, said Scott Simon, the head of mortgage bond investing at Pacific Investment Management Co., the world's largest fixed-income asset manager.

"If spreads were to remain wide it would force prices lower," said Ben Hough, the president of Hatteras Financial Corp., a Winston-Salem, N.C., investment trust that went public in April and owns about $5 billion of agency mortgage bonds. "It's definitely a detriment to the housing recovery."

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