"Fast forward to today," says Kenneth Thomas, a lecturer in finance at the Wharton School of Business at the University of Pennsylvania. He points out that investors around the world continue to buy Treasury debt, keeping yields low. But their reluctance to buy mortgage debt keeps mortgage rates higher.

"Mortgages are now considered riskier than they used to be," Thomas says. "That's one of the biggest factors in this credit crunch."

He cites the Fed's quarterly bank survey, in which 75 percent of lenders said they tightened mortgage lending standards in the second quarter of this year. "The tightening comes in many ways, including higher rates," Thomas says.

So Beijing has had a hand in raising mortgage rates with its reluctance to buy American mortgage debt, and Seattle and Charlotte, N.C., play their part as major banks raise mortgage rates to compensate for a perceived higher risk. The global financial system ties these decisions together.

This might seem strange if you applied for a mortgage five years ago and again recently. Lenders have become more strict -- demanding better documentation of income and assets and requiring bigger down payments. Today's new mortgage almost certainly has a smaller chance of going bad than a typical mortgage underwritten three years ago. If they carry less risk, why don't rates fall?

"To me, it says the banks are holding more of the profits on these mortgages to make up for the losses that they've experienced over the last several years," says Moulton.

X...X...X

Mortgage rates were mixed this week, with fixed rates falling slightly, and adjustable rates rising just a bit. This week's drop in fixed mortgage rates coincided with a report that federal officials were discussing bailout options with Fannie Mae and Freddie Mac. With this reminder that the federal government intends to keep the mortgage market functioning, rates went down.

The average 30-year fixed-rate mortgage fell 6 basis points, to 6.6 percent. A basis point is one-hundredth of a percentage point.

The average 15-year fixed -- a popular option for refinancing -- fell 4 basis points, to 6.14 percent. The average jumbo 30-year fixed fell 1 basis point, to 7.61 percent.

The one-year adjustable-rate mortgage rose 4 basis points, to 6.28 percent. The popular 5/1 ARM rose 1 basis point, to 6.27 percent.

Mortgage applications rose slightly for the week ending Aug. 22, according to the Mortgage Bankers Association. Application activity increased a seasonally adjusted 0.5 percent from a week earlier.

Refinancing activity increased by 0.3 percent, while applications for purchases increased 0.6 percent. Refinances accounted for roughly one-third of applications

Reach Holden Lewis at editors(at)bankrate.com

(Distributed by Scripps Howard News Service www.scrippsnews.com)