Benchmark mortgage rate at 4-year low
By Holden Lewis • Bankrate.com

For a while Wednesday morning, people were getting conforming mortgages at less than 5 percent.

Glenn Floyd, in Wilmington, N.C., grabbed a 30-year, fixed-rate mortgage at 4.875 percent, paying half a discount point. He describes his conversation with his broker Wednesday morning this way: "He said four, and I said, 'Lock,' before he finished saying seven-eighths."

The previous day, Floyd had been quoted a rate of 5.25 percent. It's a $312,000 loan, and he saved about $71 a month by waiting a day and getting the lower rate.

Across the country in California, Jeff Lazerson, president of online brokerage Mortgage Grader, was offering a conforming mortgage at 4.375 percent, with 1.125 discount points.

Has Lazerson ever seen mortgage rates that low? "No," he says. "Never. I'm starting on my 23rd year in the business. Never this low."

Weekly national mortgage survey

Results of Bankrate.com's Dec. 17, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Rates didn't stay that low all day. By afternoon, they had gone up about a quarter of a percentage point. Dan Green, mortgage planner with the Mobium Group in Cincinnati, told his Twitter followers: "Today reminds us: The bird in the bush is ever-elusive. Lock mortgage rates when you have the chance."

There's reason to believe that borrowers will continue to have chances. The Federal Reserve made it clear Tuesday that it intends to push mortgage rates down and keep them low for a long time.

Bankrate's weekly rate survey didn't register as dramatic a decline in rates, for reasons that will be explained shortly. The benchmark 30-year fixed-rate mortgage fell 38 basis points, to 5.42 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 0.39 discount and origination points. One year ago, the mortgage index was 6.21 percent; four weeks ago, it was 6.33 percent.

The benchmark 15-year fixed-rate mortgage fell 21 basis points, to 5.3 percent. The benchmark 5/1 adjustable-rate mortgage fell 33 basis points, to 5.84 percent.

Bankrate has been surveying mortgage rates weekly since 1985. For the benchmark 30-year mortgage, the all-time low was set June 11, 2003, at 5.28 percent. This week it's 5.42 percent. In 23 years of weekly Bankrate surveys, the benchmark rate has been below 5.42 percent eight times. The last time it was lower than 5.42 percent was March 17, 2004, when it was 5.41 percent.

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Volatile Wednesdays
In the last few months, it has been common for mortgage rates to have big up-and-down swings during the day -- a phenomenon known as volatility. In a random quirk, rates have been particularly volatile the last four Wednesdays, which happens to be the day when Bankrate conducts its weekly survey. Because of this volatility, Bankrate's survey didn't capture the depth of the week's rate decline.

This week's survey shows that it pays to shop around. In Dallas, some lenders told Bankrate that they were offering the 30-year fixed at 4.75 percent, and one thrift was offering it at 6.375 percent. In Los Angeles, Lazerson would disclose the lending source of his 4.375 percent loan only upon sworn assurance of strict secrecy.

Refi madness continues
Hoping to take advantage of low rates, masses of homeowners are calling loan officers and brokers to inquire about refinancing. "We have noticed a marked pickup in refi inquiries, many of them born of misunderstanding about what the government's policy on the 4.5 percent rate is," says Dan Dowling, president of United Mortgage Capital Corp., near Orlando, Fla.

Ah, yes -- the rumored plan by which the Treasury would do something to bring mortgage rates down to 4.5 percent. Treasury Secretary Henry Paulson denied the rumor Wednesday. Dowling says the rumor served a beneficial purpose: It focused homeowners' attention on rates. "While rates are not 4.5 percent on a refi, you sure as heck can get a 5," he says.

Even as rates rebounded above 5 percent on Wednesday afternoon, few mortgage people doubted that they'll drop again, probably not long from now. On Tuesday, the Federal Reserve slashed the overnight rate to near zero percent and promised to "employ all available tools" to stimulate the economy and keep prices from falling. The Fed mentioned its plan to buy mortgage-backed securities, which is likely to push mortgage rates downward.

Hope for the underwater
If all of this sounds too good to be true, you know what comes next: the word "but."

But only some refi applicants are able to qualify for these super-low-rate loans. The big problem: Homeowners owe more than their houses are worth, or they're on the way to owing more than their houses are worth, because of declining property values. They are "underwater" and can't refinance. Lazerson says about 70 percent of would-be refinancers fall into this category.

Those people might find relief. James Lockhart, who heads the agency that regulates Fannie Mae and Freddie Mac, says he is considering waiving appraisal requirements on refinances. If Fannie and Freddie stop requiring appraisals on refinances, then underwater homeowners would be able to refinance at lower rates -- if they've been paying on time.

Lazerson hopes Fannie and Freddie do waive appraisals. It would be a way of rewarding homeowners who have been making their mortgage payments on time, at a time when it seems like only the irresponsible borrowers have been getting breaks.

"If they would waive appraisals for people who have demonstrated that they can pay, that would help the people that are thinking about mailing the keys back to the lender, and that will keep a lot of people in their homes," he says.