Oil prices up, mortgage rates down
By Holden Lewis • Bankrate.com

Rising oil prices contributed to a second consecutive weekly drop in mortgage rates.

The benchmark 30-year fixed-rate mortgage fell 5 basis points to 5.70 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 0.32 discount and origination points. One year ago, the mortgage index was 6.04 percent.

The 15-year fixed-rate mortgage fell 7 basis points to 5.08 percent. The one-year adjustable-rate mortgage was unchanged at 4.06 percent.

Long-term mortgage rates tend to move in the same direction as yields on 10-year Treasury notes, and those yields fell when oil flirted with $55 a barrel late last week.

"The bond market furthered its recent trend of moving in lock step with oil prices: Higher oil prices, lower yields; lower oil prices, higher yields," financial analyst Harvey B. Hirschhorn wrote this week for clients of Banc of America Capital Management.

Bond traders believe that higher energy costs threaten economic growth, Hirschhorn says.

Higher energy prices could add fuel to inflation, too -- and rising prices would put upward pressure on interest rates. But right now, bond investors are more worried about the effects of rising oil prices on economic growth than on inflation.

Bankrate's benchmark 30-year rate was an already-low 5.84 percent in its Oct. 6 survey, then dropped to 5.75 percent in the Oct. 13 survey. The two-week slide incited a surge of mortgage applications, which were up 7.9 percent, seasonally adjusted, from the week before, according to the Mortgage Bankers Association. Much of that increase was the result of homeowners wanting to refinance their mortgages, as rates have fallen to a seven-month low.

Those people -- especially the homeowners who engineered cash-out refinancings, in which they borrowed more than they currently owed and pocketed the difference -- will be glad to discover that Alan Greenspan, chairman of the Federal Reserve, has given them his imprimatur.

Speaking at the annual meeting of America's Community Bankers, Greenspan said that "the surge in cash-out mortgage refinancings likely improved rather than worsened the financial condition of the average homeowner." That's especially true of people who used the money to pay off higher-interest debt.

Greenspan believes it's "quite unlikely" that there's a housing bubble that's about to pop, but that the possibility "cannot be readily dismissed." He says that if home prices did drop steeply in large swaths of the country, it could "expose recently incurred mortgage debt to decreasing values of home collateral," but on the other hand, people who have owned their homes for more than a year "have equity buffers in their homes adequate to withstand any price decline other than a very deep one."

One can hope that he will clarify his thoughts in coming weeks and months.