Last week was kind to the mortgage markets, as U.S. mortgage rates fell for the second time in three weeks.

Fannie Mae mortgage bonds moved +1 7/32, which led to a rough 0.375 percentage point drop in conforming mortgage rates.

Conforming mortgage rates include the typical "20% percent down" mortgage, as well as specialized loan programs including the HARP 2.0 loan for underwater mortgages, and the Offer Letter mortgage for relocating home buyers.

Ginnie Mae mortgage bonds improved even more, climbing +2 1/32 through the week. As a result, mortgage rates for VA loans slipped by one half-percent or more, as did FHA mortgage rates.

For now, peak mortgage rates appear to be behind us.

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Mortgage Rates : Under Federal Reserve Control?

According to Freddie Mac's weekly mortgage rate survey of 125 banks, the average 30-year fixed rate mortgage rate rose 0.22 percentage points to 4.51% last week.

It's the benchmark product's highest reading in 103 weeks. Mortgage rates are one percentage point higher as compared to just 9 weeks ago. When mortgage rates increase by 1 percentage point, mortgage payments rise 13%.

However, Freddie Mac's survey -- which is mostly "complete" by mid-day Tuesday -- failed to capture last week's on-the-street action. Mortgage rates made big gains in the latter half of the week, a storyline which escaped surveyed responses.

The news was centered on the Fed.

Since May, Wall Street has shown concern for the future of QE3, the Federal Reserve's long-standing mortgage market stimulus plan. Via QE3, the central banker has purchased $40 billion of U.S.-issued mortgage-backed securities (MBS) in the open market monthly, a move which helps to keep bond prices high.

All things equal, bond prices and U.S. mortgage rates move in opposite directions. In this way, QE3 has helped to suppress mortgage rates on everything from conforming and VA loans to FHA and USDA product.

10 weeks ago, given the growing strength of the U.S. economy, the Federal Reserve said that it will consider "altering" the size of its mortgage bond purchase program, a move which Wall Street has called "the taper".

Gradually, Wall Street believes, the Federal Reserve will reduce its monthly $40 billion program into something smaller until, eventually, the purchases total zero.

A taper in the QE3 program would reduce demand for U.S. mortgage bonds, Wall Street reasons, which would result in lower MBS prices. To get ahead of such a trade, investors have been selling mortgage bonds en masse, and at a faster rate than during any period in recent memory.

This is why mortgage rates have climbed so high, so quickly -- it's a bet against QE3.

Last week, however, in a planned speech, Federal Reserve Chairman Ber Bernanke worked to undo that bet. His comments included the following :

• The U.S. labor market may be weaker than the Unemployment Rate suggests
• The Fed Funds Rate is likely to remain low for a long, long time
• Recently rising rates threaten the recovery, and are concerning to some Fed members

Mortgage rates immediately improved on the news, and rates may continue to move lower through this week and next. The Federal Reserve is trying hard to keep Wall Street in check and, while the Federal Reserve does not control mortgage rates, it carries influence, absolutely.

Click to get mortgage rates as of 10:40 AM ET today.

Why Mortgage Rates Should Fall This Week

U.S. mortgage rates have been volatile since May and rapidly-changing rates makes it hard to shop for "a great deal".

The pain is worse when rates are climbing and homeownership costs have soared in the past 10 weeks. Yet, purchase mortgage activity has been thus far unaffected by rising rising despite today's buyers losing more than 10% of their purchasing power.

Demand for the HARP 2 refinance remains high, too. Despite an increase in general mortgage rates, millions of underwater U.S. homeowners still stand to save thousands of dollars annually via the government-backed program and they're applying for the loan in droves.

HARP loans now account for roughly twenty-five percent of today's refinance applications, says the Mortgage Bankers Association.

For everyone, though, this week may be a good one. Mortgage rates have reason to drop. The economic calendar is light, and Fed Chairman Ben Bernanke gives his semi-annual testimony to Congress, a speech in which the chairman will likely re-iterate that Wall Street has over-reacted to the Federal Reserve's comments about QE3.

The week's calendar is as follows :

• Monday : Retail Sales
• Tuesday : Consumer Price Index (CPI); Housing Market Index
• Wednesday : Housing Starts; Beige Book; Bernanke Speech
• Thursday : Initial Jobless Claims; Bernanke Speech
• Friday : None

Mortgage rates are most likely to move on Wednesday and Thursday while Fed Chairman Bernanke is speaking. We ready for rates to rise or fall. If rates rise, the moves are expected to be modest.

If rates fall, however, the action could be sharp.

A Second Chance To Refinance?

Mortgage rates are higher as compared to May but, for many U.S. households, the opportunity to refinance to a low rate remains; and for today's home buyers, purchasing power is still high.

Today's mortgage rates aren't so glamorous as compared to the 3-percent range from the early part of this year. However, at 4 percent, rates remain historically low and cheap. See what today's rates can do for you budget. Get started with a rate quote online.

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