While Freddie Mac (FRE) reported Thursday that mortgage rates had fallen by 15 basis points to an average of 5.78 percent for a conforming 30-year fixed-rate mortgage during the week ended Sept. 18, rates have been anything but stable this week, according to HW's market sources. The Freddie Mac-reported rate is the lowest since February, but it may not remain there for long if financial markets continue to convulse. Rates have jumped sharply in recent days, according to a story filed Thursday at the Wall Street Journal -- not exactly the outcome most had in mind when the Treasury put both GSEs into conservatorship two weeks back. According to the Journal, which cited data from HSH Associates, conforming 30-year-fixed mortgage rates now average 6.11 percent, a full 33 basis points above the numbers reported by Freddie Mac. The Journal cited unnamed brokers in suggesting that rates have risen "one-eighth to one-quarter of a percentage point in the past two days." The Freddie data suggested that rates on adjustable-rate mortgages slid this week as well, with five-year Treasury-indexed hybrid ARMs falling from 5.87 percent to 5.67 percent; likewise, the average rate on one-year ARMs dropped 18 basis points to 5.03 percent. Such steep drops in ARM rates likely reflect a "flight to quality" by investors in the wake of Lehman's bankrtupcy and Merrill's sellout; investors had flooded Treasuries in recent days -- the result has been lower yields on Treasuries as prices were bid upward, a trend that reversed on Thursday as investors returned to equities. That said, the relationship most originators associate between Treasuries and mortgage rates has been more tenuous than ever this year, something the Journal noted; its coverage quoted Mahesh Swaminathan, a mortgage strategist at Credit Suisse Group (CS), as saying the spread between mortgages and Treasuries had risen by 35 basis points in the past week amid market convulsions. One of HW's sources said the spread had widened by 47 basis points between the government's takeover of the GSEs to yesterday's close. Conforming mortgage rates are only part of the mortgage picture, of course; and for jumbo borrowers -- those looking to buy a property outside of the conforming loan limits -- rates have soared. Rates currently average 7.42 percent for 30-year fixed-rate jumbo mortgages, according to HSH data. Adding to the problem is the effect of a planned sale by Merrill Lynch & Co. (MER) and the bankruptcy of Lehman Brothers Holdings Inc. (LEH), both of whom were large players in the secondary mortgage market. A source told HW on Thursday that there is essentially no mortgage repo market at present, as a result of recent market upheaval. "That is a serious problem," said the source. "The [mortgage spread] widening is definitely linked to the lack of any bids in the roll," said the source, an ABS/MBS analyst that asked not to be named. "With no bid, it forces people to take delivery, forcing dealers who haven't a lot of capital to spare to take delivery." The repurchase, or repo market, is critical to modern financial markets because it provides banks with the ability to fund their own operations. (Explanatory note: in a repo trade, fixed-income securities are lent out for cash over short periods of time; the mortgage market's giant TBA market utilizes a type of repo known as a dollar roll. Rolls have some key differences from traditional repos, but we won't discuss that here; it should be enough to just note that a whole lot of MBS trades are financed this way). Bottom line: what really caused the failure of Bear Stearns, for example, wasn't the stock price drop per se. It was that Bear suddenly found itself locked out of the repo market. It's why the Fed began the Term Securities Lending Facility, with the hopes of at least providing some temporary funding to ailing investment banks; clearly, the TSLF didn't provide much help to Lehman. The simple fact is that the complex troubles now being observed within the secondary mortgage market will be felt in mortgage rates borrowers see going forward. If we see rates continue to jump around in the weeks ahead, you'd need look no further for a reason why. Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.