Mortgage rates drop way down
By Holden Lewis • Bankrate.com

The year began with low mortgage rates and ended with even lower rates, and a bunch of crazy stuff happened in between.

The benchmark 30-year fixed-rate mortgage fell 20 basis points, to 5.64 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 6.14 percent; four weeks ago, it was 5.92 percent.

The benchmark 15-year fixed-rate mortgage fell 30 basis points, to 5.16 percent. The benchmark 5/1 adjustable-rate mortgage fell 9 basis points, to 5.86 percent.

At 5.64 percent, Bankrate's benchmark 30-year rate was lower two weeks ago (when it was 5.42 percent). Before that, the last time it was lower was in June 2003, in the midst of the biggest refinancing boom in history.

Weekly national mortgage survey

Results of Bankrate.com's Dec. 31, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Craziness recap
The current refi boom isn't as big as the one five-and-a-half years ago, because of tighter credit and falling home prices. Back in 2003, lenders were beginning to pitch mortgage products to wage earners that previously had been marketed to business owners, salespeople on commission and corporate executives who routinely got much of their income through bonuses. As wage earners began to get lots of option-ARM and interest-only mortgages, lenders competed for business by relaxing their lending standards. Down payments were lambasted as relics of the past, and subprime loans became mainstream.

Loose credit caused a house-buying frenzy from about 2002 to early 2007, and prices skyrocketed. Then things reversed course, starting in 2007 and accelerating in 2008. Credit standards began to tighten as house prices fell. The two trends reinforced each other -- falling home prices caused lenders to impose more strict loan standards, and more strict standards led to fewer home sales and thus lower prices.

As the spiral of falling prices and more strict standards continued throughout 2008, a recession deepened and prominent financial institutions failed or were taken over. Among the biggest giants to topple were Fannie Mae and Freddie Mac, as the federal government effectively seized control.

The Federal Reserve says it plans to buy up to $500 billion worth of mortgage-backed securities from Fannie, Freddie and their cousin, Ginnie Mae, in the first half of 2009. (Ginnie Mae guarantees government-insured or guaranteed loans from the Federal Housing Administration and Veterans Affairs.) This half-trillion-dollar spending plan is designed to keep mortgage rates low and to stimulate home sales. Most observers believe the Fed's plan to buy mortgages was the catalyst that caused rates to fall at the end of 2008.

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The year began with rates staying below 6 percent through most of January. Then they began to rise. The 30-year rate averaged more than 6.5 percent in June, July and August, and stayed well above 6 percent through November.

But then came the Fed's announcement Nov. 25, that it would buy $500 billion worth of mortgage-backed securities, and another $100 billion in Fannie and Freddie debt. Rates plummeted immediately, and averaged 5.72 percent in December.

For all of 2008, Bankrate's benchmark 30-year fixed averaged 6.23 percent. That was below the 2007 average of 6.4 percent and the 2006 average of 6.47 percent, but above the 2005 average of 5.93 percent.