Mortgage rates approach record low
By Holden Lewis • Bankrate.com

Mortgage rates continue to plunge toward record territory.

The benchmark 30-year fixed-rate mortgage fell 31 basis points, to 5.33 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 5.88 percent; four weeks ago, it was 5.8 percent.

The benchmark 15-year fixed-rate mortgage fell 31 basis points, to 4.85 percent. The benchmark 5/1 adjustable-rate mortgage fell 14 basis points, to 5.72 percent.

These benchmark rates are averages. Rate shoppers with excellent credit and plenty of equity (or a big down payment) can do better.

Weekly national mortgage survey

Results of Bankrate.com's Jan. 7, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

"Right now, the 30-year (fixed) I have this morning -- I have 4 5/8 (percent) on a regular conforming and I have 4 3/8 (percent) on a 15-year today," all with 1 discount point plus fees, says Jeff Lazerson, president of MortgageGrader.com, a brokerage in Southern California. Minutes later, he sends an update by e-mail -- the 15-year fixed is available at 4.25 percent.

For Lazerson, business is better than it's been since summer 2003, the last time rates dropped so low. In Bankrate's weekly survey going back to 1985, the 30-year fixed hit a record low of 5.28 percent June 11, 2003, and was 5.31 percent two weeks later. This weeks' rate of 5.33 percent is the third-lowest in the 23-plus-year history of Bankrate's weekly survey.

Income and debt ratios rule
About four in five applicants today are homeowners who want to refinance their current loans, according to the Mortgage Bankers Association. In formerly hot real estate markets, a lot of those applicants are turned away because house values have fallen and they don't have enough equity in the home to refinance. "Maybe 30 percent of the people we can actually help, and 70 percent we cannot help, and the primary driver is they don't have any equity," Lazerson says. "The secondary issue is their income and debt ratios won't fly and the third issue is credit score."

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When Lazerson mentions income and debt ratios, he refers to guidelines that limit borrowing ability to ensure that mortgages are affordable. Generally, Fannie Mae and Freddie Mac want to keep borrowers' total debt payments to 36 percent of before-tax income. That's total debt payments -- house, vehicles, credit cards, student loans. The FHA is more lenient, and likes to limit total debt payments to 41 percent of gross income. Lenders can make exceptions, but they're not inclined to during this credit squeeze.

While it can be hard to qualify for a refi, the picture is brighter for homebuyers. They can get Federal Housing Administration-insured mortgages, which require down payments as low as 3.5 percent. "I would say that most of the first-time buyers calling in -- 75 percent of those people -- we can actually help because FHA is more lenient about credit scores," Lazerson says.

Volume affected rates
The reasons for this week's drop in rates are complicated. First of all, Bankrate surveys the same 100 lenders each week -- 10 lenders in 10 large markets -- and some of those lenders had been quoting high rates because they already had as much business as they could handle.

During this downturn, lenders "whacked (operational) staff en masse and simply can't handle intense volume today," writes Jim Sahnger, mortgage planner with Palm Beach Financial Network, in an e-mail from his office in Stuart, Fla. "So, if you are already at capacity, (you) increase rates and then you can concentrate on getting your loans closed without being bombarded by new apps."

Certain lenders in Bankrate's survey -- Bank of America, most prominently, and also Chase and Citi -- had kept rates high for the past few weeks. But they dramatically cut their rates on the 30-year fixed this week, and that's partly what's behind this week's decline in the Bankrate survey.

And then there's the Federal Reserve, which last week opened the checkbook for the first time on its promised shopping spree for mortgage-backed securities. The Fed plans to buy up to a half-trillion dollars' worth of mortgage-backed securities in the first half of the year. Think of the Fed as an extremely deep-pocketed bank, competing with other banks to provide money for mortgages. When banks compete, you win: Rates go lower.