Did you hear? Mortgage rates are surging. That should be no surprise. All we had to do was look at the sharp sell off in US treasuries and you know that mortgage rates would follow suit. The 30 year fixed rate mortgage rate jumped to 5.29%, up from 4.91% just a week ago. On April 2nd the rate was 4.78%.

Just to give you an example in real dollar terms, let's take a $200,000 30 year fixed mortgage at 5.29%. Your monthly payment would be $1109.37 and your 30 payments would be $399,372.25. At 4.91% your monthly payment would be 1062.67 and your 30 payments would be $382,560. So in real dollar terms your cost has risen $16,812.00. In addition lenders are charging 0.7% in fees and points, unchanged from the previous week.

There is an old saying: "never fight the Fed." If you had been short this bond market, you probably could be wiped out in one afternoon. When the Federal Reserve made its announcement a short time ago that they were buying long term securities the futures on the long bond jumped 4.25 basis points, or more that $4000.00 on just one contract. If you were long say 10 contracts you would be sitting on a $40,000 profit this afternoon.

The Bank of England cut its key rate by half a percentage point to 1%. However, even with the move, the Monetary Policy Committee (MPC) said that there was still disruption in money markets and the rate cuts have not yet had their full impact.

The MPC cited the sharp drop in output in the fourth quarter of last year and a similar drop early this year.

Nationwide, the UK's largest building society announced that it reduced its base mortgage rate to 3% from 3.5%.The MPC pointed to the global nature of the current slowdown and stated that the supply of credit to households and businesses remained constrained.

The Associated Press reports that mortgage rates are back up to where they were in August 2007. How can that be? After all, since then, the Fed has cut its Fed Funds rate from 5.25% to 2%. I guess Federal Reserve Chairman, Ben Bernanke's effort to forestall another Great Depression by flooding the zone with more debt has fallen victim to the law of unintended consequences.

While his efforts have not loosened the credit crunch, they have succeeded in boosting inflation to levels not seen in decades. And isn't that exactly the thing that the Fed is supposed to prevent? I was stunned to see that, as AP reported, the rate on 30-year mortgages hit 6.63% this week -- up significantly from last week's 6.26%. It hasn't been that high since August 1, 2007 -- when it hit 6.68% -- before the Fed started cutting rates.

This makes me wonder whether the Fed would have been better off leaving rates at 5.25% last fall. If so, it is likely that inflation would have remained lower instead of spiraling out of control and driving gasoline prices over $4 a gallon, tripling food prices and putting those who are paying now to heat their homes this winter into sticker shock. Simply put, the Fed rate cuts have not uncrunched credit but they have boosted inflation.

The Mortgage Bankers Association's composite index of applications declined 14.2% on a seasonally-adjusted basis to 637.6 from last week's 734.4.

The Refinance Index decreased 20.2% to 2,286.3 from 2,866.0 the previous week and the seasonally adjusted Purchase Index decreased 6.4% to 357.3 from 381.6 one week earlier.

Rates rise

Meanwhile, the average rate for a 30-year fixed loan rose to 6.04% from 5.74% the prior week. The average rate for a 15-year fixed mortgage increased to 5.60% from 5.27%.

Bloomberg News reports that Bank of America Corporation (NYSE: BAC) thinks that mortgages have further to fall. And Bank of America names specific companies which it believes will be damaged the most.

The bank believes that mortgage losses so far are "the tip of the iceberg." That's due to the enormous volume of variable rate mortgages scheduled to reset in the next couple years -- specifically $515 billion in 2007 and another $680 billion worth in 2008. If that's not bad enough, interest payments on about $900 billion of the riskiest subprime home loans are due to increase in 2007 and 2008.

I've been posting about real estate problems since last October. But Bank of America seems to think that two of the stocks most exposed to the mortgage mayhem have further to fall because they hold mortgages themselves as well as selling them on to investors and may not have set aside enough money to cover losses. These two:

• IndyMac Bancorp (NYSE: IMB) looks cheap. Its Price Earnings to Growth (PEG) ratio of 0.2 -- based on a P/E of 7.4 and earnings growth of 35% to $3.97 in 2008 -- makes it look extremely cheap to me unless the analysts who track IndyMac are way off the mark.
• Countrywide Financial Corp. (NYSE: CFC) looks cheap. Its PEG ratio of 0.5 -- based on a P/E of 9.7 and earnings growth of 19% to $4.55 in 2008 -- makes it look inexpensive to me unless the analysts who track Countrywide are way off the mark.

What investors need to figure out is whether their current stock prices reflect all the bad news or whether things will get still worse. I'd be inclined to think that the bad news is reflected in the stocks already and Bank of America is wrong about these two stocks. What do you think?

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post