Home buyers again saw mortgage rates rise this week alongside word that the economy is beginning to improve. According to the Wall Street Journal, rates for a 30-year home loan rose above 5 percent for the first time since September, rising to 5.03 percent. Rates for 15-year fixed rate and five and one-year adjustable rate loans also saw a rise in numbers. 15-year fixed rate mortgages climbed from 4.43 percent to 4.46 percent, while five-year adjustable rate loans rose from 4.42 percent to 4.40 percent. The rates for one-year adjustable rate mortgages are at 4.57 percent, up from 4.54 percent a week ago.

While the fact that the Federal Reserve felt confident enough to raise the rates is encouraging, the drop in mortgage applications and refinances put a damper on this news. According to the Washington Post, new home purchases dropped to a 402,000 annual pace, or 3.6 percent, in September. It was the first time since March that new home sales declined from month-to-month. The number of mortgage applications fell 5.2 percent in the third week of October, while lenders saw a 16 percent drop in applications from homeowners looking to refinance.

The news of the decline in mortgage applications for new home purchases is a bit discouraging for the housing industry. The $8,000 tax credit for first-time home buyers had helped provide an incentive to purchasers and drive new home purchases. However, with the tax credit ending and no definite word yet on an extension combined with the continuing rise in mortgage rates, the numbers may not improve for a while.

Rising home prices may also be playing a part in the declining number of applications. While an increase in home prices does signal growing buyer confidence and an economic upswing, it may be discouraging some buyers from purchasing a new home. Even as economists state they are beginning to see improvement in the economy, the public has not yet tended to agree, and rising home prices are likely to play a contributing factor in the decline of buyers applying for mortgage loans.

The mortgage rates for this week are still significantly below where they were a year ago, and are considered to be very low when compared to longer-term historical numbers. The low mortgage rates are a positive for the housing industry as buyers lock in their loans at lower rates. Unfortunately, with consumer confidence still not lining up with increasing economist confidence, the rise in rates may mean a dip in sales until confidence increases.

The U.S. may experience another shock wave of foreclosures as early as next year, sooner than expected, according to data released Tuesday from Fitch Ratings.

The company reported that almost $29 billion worth of option adjustable rate mortgages (ARMs) are poised to reset next year based on its analysis of a large group of loans originated in the last phases of the recent housing boom. 

Pay option ARMs differ from other ARMs in that borrowers are allowed to choose from four different payment options each month during the initial term. The option most exercised by borrowers is the lowest payment amount, which does not even cover the full amount of monthly interest due on the home loan.  After making only this minimum payment for several years, and with the aid of decreasing home values, many homeowners find themselves in upside-down mortgages, meaning they  owe more on the mortgage than their home is worth.

Lenders only allow borrowers to build up a certain amount of negative amortization on their home loans before they reset the interest rate and require higher payments.  And as most option ARM borrowers have only been making the minimum payment since their loans began,  their  mortgage interest rates will reset sooner than they otherwise would have.

Fitch Ratings has estimated that most of those with these option ARMs will see an increase of $1,053 in monthly mortgage bills, a figure that is likely to be too high for many to keep up with, resulting in mass foreclosures across the U.S. once again.

“The combined impact of payment shock, negative amortization, declining home prices and restricted availability of mortgage credit may leave many option ARMs’ borrowers unwilling to continue paying their mortgage,” said Group Managing Director and U.S. RMBS group head Huxley Somerville in a statement.

According to the credit rating firm, the foreclosure wave is likely to last well into the beginning of the next decade, as there are an additional $67 billion in pay option ARMs  due to reset  in 2010.