Ben meet rock meet hard place. http://finance.yahoo.com/banking-bu...-budgeting&sec=topStories&pos=3&asset=&ccode= Mortgage Twist Presents Fed With a Puzzle by Kelly Evans Wednesday, September 21, 2011 Lower interest rates don't automatically mean cheaper mortgages. On Wednesday, the Federal Reserve will conclude its latest policy meeting and may announce further measures aimed at lowering long-term borrowing costs. One option is called "Operation Twist:" the Fed would sell some of its short-term holdings and buy longer-term U.S. debt to push yieldsâwhich are already at historic lowsâeven lower. Why? One clear aim of Fed policy, as Chairman Ben Bernanke wrote in an op-ed last year, is to bring about "lower mortgage rates [that] will make housing more affordable and allow more homeowners to refinance." The trouble is, the relationship between Treasury yields and mortgage rates isn't perfect. And in recent weeks, the difference, or spread, between the 10-year Treasury yield and Freddie Mac's average 30-year fixed-rate mortgage has widened considerably. As of last week, the difference between these two was more than two percentage-points. That compares with a low of about 1.3 percentage-points as recently as April. In other words, were the spread still as tight today as it was this spring, the 30-year mortgage rate would now be averaging about 3.3%. Instead, it is still over 4%. While low by historical standards, that hasn't been enough to trigger a massive refinancing boom, as weekly mortgage-application data out Wednesday are once again likely to show. The reason this spread has widened is largely because investors have started to balk. The lower yields go, the less inclined investors are to hold mortgage-backed securities. That puts upward pressure on rates. So too does the possibility of a major refinance program from the Obama administration. That could lead to hits for some holders of mortgage-backed securities, which may prompt some to sell in advance of any such program. This leaves the Fed and the White House inadvertently working at odds with one another. Consider that yet another example of unintended consequences. In light of this, it will be increasingly difficult for the Fed to bring about lower mortgage rates, even if it manages to push long-term interest rates down further. Of course, it isn't mortgage rates themselves so much as creditworthiness and lending constraints that are keeping many households from being able to refinance. And that is a problem the Fed can't fix.