Terror puts mortgage market in uncharted territory
By Holden Lewis • Bankrate.com

The question on mortgage-hunters' minds is how the terrorist bombings in New York and Washington will affect rates. Here's the short answer: They'll probably drop.

Here's the longer answer: Predicting mortgage rates is always an educated guess, but it's even more of a guess this week because Tuesday's terrorism is unlike anything that has happened before. The terrorists destroyed a major financial center.

The closest thing to a precedent was the terrorist bombing that damaged the World Trade Center on Feb. 26, 1993. Mortgage rates then were unaffected, according to Bankrate.com data. That's because investors eight years ago judged that the terrorist action would have a minuscule effect on the overall economy, and they were right.

But the 1993 bombing killed six people and most people who had offices in the twin towers were able to recover files in their computers and cabinets. Tuesday's destruction of the World Trade Center caused huge loss of life, including untold numbers of people who help run the financial markets. No one can calculate the loss of knowledge, expertise and data.

In recognition of those horrible facts, stock and bond markets were closed Tuesday and Wednesday. Long-term mortgage rates tend to follow long-term yields on Treasury bonds. Since bond markets were closed, mortgage bankers had incomplete information with which to update mortgage rates.

The trend in mortgage rates already had edged downward, according to the Bankrate.com national survey of large institutions.

During the week ending Sept. 12, the 30-year fixed rate fell 1 basis point to 6.93 percent and the 15-year fixed rate dropped 2 basis points to 6.47 percent. A basis point is one one-hundredth of 1 percent.

Banks are in business
In the period after the terrorist attacks, it was business as usual for most mortgage shoppers. The day after the bombings, Bankrate.com queried 100 banks for the weekly mortgage survey, and all 100 quoted mortgage rates. A few scattered banks not included in the survey were not quoting rates.

"We're locking loans," says Chuck Holroyd, executive vice president of marketing at IndyMac Bank in Irvine, Calif. "The upfront loan locking and pricing and getting rate quotes is totally unaffected." He added that the number of mortgage applications dropped by half on Tuesday compared to the day before.

Most lenders sell the mortgages they make into what's called the secondary market. Fannie Mae and Freddie Mac, the two largest market players, typically buy loans from banks and other mortgage lenders and either hold those loans or help combine them into mortgage-backed securities. These MBSs are a form of bond traded on Wall Street. The prices loans fetch and the yields at which MBSs trade help determine the rates charged to mortgage borrowers.

Because the bond market shut down after the New York terrorist attacks, it was unknown whether lenders would continue to lend. But rather than stop making mortgages, Holroyd says, some are simply pricing loans based on Monday's market trading. Others were coming up with mortgage rates based on their own formulas.

When the dust settles
Ken Mayland, president of ClearView Economics in Pepper Pike, Ohio, says he expects investors to flee from stocks in "the very short run" and put their money in Treasury bills, notes and bonds because those instruments are viewed as a safe haven. That will cause Treasury yields to drop, so "I think we can anticipate a drop in mortgage rates," Mayland says.

Because mortgage bankers don't have the bond information they need they "either take some risks or defer," Mayland says, adding, "I'm not sure how many people are going out today and buying a home and acquiring mortgage financing today."

What about the longer term? Bryan Taylor, president of Global Financial Data, a database of economic information that goes back more than 200 years, doesn't believe that the attacks will have a long-term effect on the economy. In an analysis posted on his company's Web site, he says he thinks that in the short-term oil prices will rise and stocks will fall, following the usual pattern that we see when the United States is involved in a war.

But within a few weeks, stock and bond markets tend to head back to where they were before fighting started, and Taylor believes the markets will follow the same sort of pattern after these terrorist attacks.

Mayland notes that European stock markets generally closed in positive territory on Wednesday, so they recovered from the shock of the attacks quickly. If the U.S. stock markets drop much after they reopen, Mayland expects the Federal Reserve to jump in and cut interest rates earlier than expected. That would reduce adjustable-rate mortgages, which Mayland says are becoming "a more interesting and viable product."

Bankrate staff writer Michael D. Larson contributed to this report