Weekly survey: Mortgage rates tumble
By Holden Lewis • Bankrate.com

Mortgage rates have dropped to their lowest point since July.

The benchmark 30-year fixed-rate mortgage fell 13 basis points to 5.58 percent, according to the Bankrate.com 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 0.35 discount and origination points. One year ago, the mortgage index was 5.90 percent. The benchmark 30-year rate hasn't been lower since July 2, at 5.50 percent.

The 15-year fixed-rate mortgage fell 11 basis points to 4.91 percent. The one-year adjustable-rate mortgage fell 10 basis points to 3.60 percent.

The average 30-year rate had hovered between 5.68 percent and 5.72 percent for five weeks -- unusually steady. Then Alan Greenspan, chairman of the Federal Reserve, delivered the first of his twice-a-year economic summaries to Congress last week. Treasury yields and mortgage rates had started dropping by the time he got to the question-and-answer session.

Greenspan started out by saying that the prospects are good for a sustained economic expansion because of higher corporate profits, low interest rates and increased government spending. "At the same time," he said, "increases in efficiency and a significant level of underutilized resources should help keep a lid on inflation."

Right there, when Greenspan predicted that inflation would remain low, Treasury yields and long-term interest rates started dropping.

Wall Street harkened back to speeches that Greenspan and other Fed officials made in early January at the annual meeting of the American Economic Association. "The first time he spoke (this year), a few weeks back, there was thought that perhaps there may be problems with inflation -- the economy might be growing too fast and he might have to raise rates," says Dave Herpers, director of consumer affairs for mortgage lender Amerisave.

That was the perception, though perhaps not the reality. Greenspan's speech in early January was characteristically subtle and cautious. His biggest point was that the Fed has adopted a "risk-management approach" to interest rate policy. This approach, oversimplified, means that the Fed would rather risk causing inflation, which it knows it can fight, than risk allowing deflation, which is difficult to combat.

That was a way of saying that the Fed was committed to keeping rates low for now, even if that risked inflation and higher rates later. Late in January, the Fed tweaked the wording on a statement explaining why it kept short-term rates steady, and some on Wall Street interpreted that as a hint by the Fed that a rate increase could come within a few months.

In his congressional testimony last week, Greenspan seemed to reiterate that low rates are here for quite a while. Herpers says the bond market always overreacts, and it probably overreacted then -- and that's why long-term mortgage rates are down this week. He thinks 30-year rates will gradually rise back to the level where they plateaued for more than a month -- around 5.70 percent.

The dip in mortgage rates sent home buyers and homeowners into mortgage offices. The Mortgage Bankers Association says applications for purchase loans increased 2.9 percent last week, and applications for refinancings increased 6.4 percent.