Mortgage rates fall; borrowers wait
By Holden Lewis • Bankrate.com

Mortgage rates fell this week, but not much. Not many people are applying for home loans.

The benchmark 30-year, fixed-rate mortgage fell 4 basis points, to 5.37 percent, according to the Bankrate.com's national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index was 6.39 percent; four weeks ago, it was 5.34 percent.

The benchmark 15-year, fixed-rate mortgage fell 6 basis points, to 4.88 percent. The benchmark 5/1 adjustable-rate mortgage fell 5 basis points, to 5.34 percent.

Weekly national mortgage survey

Results of Bankrate.com's March 11, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

The Mortgage Bankers Association says there was an 11.3 percent increase in mortgage applications last week. More than two-thirds of those applications came from homeowners who wanted to refinance.

Some of those people applied for loans with more than one lender, hoping to have their applications approved by at least one, even if others reject it. The MBA counts applications and not applicants, so if one borrower files five applications, the MBA's index counts it five times. This brings up the question of whether the MBA's index exaggerates the number of people who are trying to get home loans.

How many applicants are there?
Paul Descloux, publisher of Mortgage Maxx, uses data from title companies to track how many people are applying for mortgages. The result is an index called the MAX. Last week, his index fell 5.1 percent, even as the MBA's application index rose 11.3 percent. If both indexes are accurate, then roughly 16 percent of applicants are applying for loans at two places.

In a weekly report, Descloux writes, "With consumer psyche traumatized, 20 percent of all homeowners over the negative equity cliff into the drink, and whole swaths of potential mortgagors (i.e., borrowers) unable to qualify, the MAX may already have passed its highs for 2009."

From Descloux's vantage point, it looks like home sales will stall during the traditional buying season this spring and summer. Cautious homeowners will slow the housing market even more as they insist upon selling their current homes before buying new ones. Meanwhile, ARMs are resetting at attractive rates, which reduces the need for ARM borrowers to refinance.

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Waiting for less than 5 percent
There's another reason that potential borrowers remain sitting on the fence: the persistent and widespread notion that the federal government will take mortgage rates down to 4.5 or even 4 percent. There is little evidence that the Federal Reserve and Treasury intend to reduce mortgage rates that much and less evidence that they would be able to do it and keep rates there for long.

"There's a bunch of assumptions being made by everybody -- by potential borrowers, by lenders, by everyone. It's a great, big, giant ball of confusion," says Bob Walters, chief economist for Quicken Loans. One of those assumptions is that mortgage rates will drop to 4 percent, so they decide not to refinance now, and wait for rates to fall even more.

"So a lot of people are making assumptions that great things are going to happen, when, quite frankly, when you know the facts, it's less likely than they may think. The reason I qualify that is, do I definitely know what's going to happen? I don't, because somebody in Washington can change the rules tomorrow. So that always has to be considered. But if you look at the facts, and you look at the trends, you start to say, I'm not so sure the kinds of things that people are hoping for are going to happen to them."

One way to look at it is to consider what's happened to mortgage rates this year. In Bankrate's weekly index, the 30-year fixed has averaged 5.43 percent so far in 2009. In the last five weeks, it hasn't been lower than 5.34 percent or higher than 5.41 percent. This doesn't seem consistent with the theory that the Fed and Treasury want to drop mortgage rates by another percentage point.

"The underlying premise in a lot of people's thinking is that interest rates will be taken lower," Walters says. "And I don't think the facts support that."