Mortgage rates fall on investor's words

Long-term mortgage rates fell again, for the 11th time in the last 13 weeks, after a prominent bond-fund manager speculated that the Federal Reserve might cut interest rates late this year.

Mortgage rates had been steady for a week until Bill Gross, chief investment officer for PIMCO, predicted at a conference that the Fed will raise short-term rates another half-point this summer, then reduce rates late in the year. That's decidedly a minority view. But investors respect Gross, and they heed his words. When his prediction was reported on Tuesday, long-term Treasury yields fell. So did long-term mortgage rates.

The benchmark 30-year fixed-rate mortgage fell 7 basis points to 5.66 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 0.36 discount and origination points. One year ago, the mortgage index was 6.3 percent.

The 15-year fixed-rate mortgage fell 5 basis points to 5.28 percent. The 5/1 adjustable-rate mortgage fell 3 basis points to 5.20 percent.

Prediction: Fed may reverse course
According to Reuters and Bloomberg news services, Gross told a conference of financial planners in Chicago that he believes the Fed will raise the federal funds rate to 3.5 percent from its current 3 percent. But, he added, the Fed might start cutting the short-term rate by the end of the year "if only to impart a bid to the U.S. housing market."

Gross was predicting a Fed victory over inflation. Such a triumph would make bonds and mortgage-backed securities more valuable. Buoyed by Gross's words Tuesday, investors bought bonds and mortgage-backed securities, sending their prices up and sending yields and mortgage rates down.

As if housing needs help ...
Not everyone buys Gross's forecast or his reasoning. The U.S. housing market is operating at full boil, and it's hard to imagine that the Fed would need to ignite another burner under it.

Color Mitch Ohlbaum skeptical. Anytime a guy such as Gross opens his mouth, he's doing it to enhance his position, says Ohlbaum, president of Legend Mortgage Corp., a broker in Los Angeles. Gross knows that his pronouncements can move markets, says Ohlbaum. Gross's comments started a bond-buying frenzy; what if Gross needed to unload some bonds?

Alan Greenspan, chairman of the Federal Reserve, "has given no indication whatsoever that he's planning on lowering rates," Ohlbaum says. "He's making sure that he's going to squeeze every ounce of inflation he can before he leaves."

Greenspan is schedule to retire in January.

The majority view
The housing industry's leading economists believe mortgage rates are much more likely to rise than to fall. Last week, economists from the banking, home-building and real-estate industries opined about the economy's prospects for the rest of the year. They predict economic growth and two to five more Fed rate increases.

None of them predicted a Fed rate decrease.

The Bankrate 30-year mortgage rate index was 6.15 percent March 23. It has fallen every week since then except for May 11 and June 15. The rate has remained under 6 percent for 11 weeks in a row.