Rates drop this week -- or do they?
By Holden Lewis • Bankrate.com

Mortgage rates have been volatile this year, moving up and down as rapidly as an oscilloscope. That trend continued this week.

The benchmark 30-year fixed-rate mortgage fell 9 basis points, to 6.32 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 6.19 percent; four weeks ago, it was 5.78 percent.

The benchmark 15-year fixed-rate mortgage fell 8 basis points, to 5.79 percent, and the 30-year fixed jumbo, for loans greater than $417,000, was unchanged, at 7.43 percent. The benchmark 5/1 adjustable-rate mortgage rose basis points, to 5.72 percent.

This is where volatility enters the picture. The rate on the 30-year fixed made a startling jump Wednesday. It went up a quarter of a percentage point or more in the afternoon -- after Bankrate's research department had gathered the bulk of the day's rate information.

Weekly national mortgage survey

Results of Bankrate.com's March 5, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

What caused wide swings?
Had the rate data been collected in the afternoon instead of in the morning, the benchmark rate would have been up 15 or 20 basis points, instead of down 9 basis points. Wide, intraday swings in rates have become almost the norm this year. That causes rate surveys to quickly become out of date, no matter the methodology.

Wednesday's big jump in mortgage rates served as evidence of a huge sell-off of mortgage-backed securities. There was no ready explanation for investors' sudden aversion to mortgage-backed securities.

"There is no reason this should happen," says Dick Lepre, senior loan consultant with Residential Pacific Mortgage in San Francisco. "It's neither supported by the fundamentals or the techs."

Grasping at the easiest explanation on the shelf, much of the financial press attributed the sell-off to the news that bond insurer Ambac Financial Group had found a way to preserve its AAA credit rating. But the Ambac announcement was hardly a surprise. Even if the announcement had come as a shock, a jolt in mortgage rates wouldn't have been an obvious reaction.

Lepre guesses that bond investors are worried about inflation -- that they believe high commodity prices, along with Federal Reserve rate cuts, will lead to a spike in consumer prices. But, he acknowledges, that doesn't explain the big one-day move in mortgage rates.

At Palm Beach Financial Network in Stuart, Fla., mortgage broker Jim Sahnger looks at a graph and marvels that big, one-day swings in mortgage rates have become the norm, especially in the last month.

"There's not a week that goes by that I don't get off the phone 20 times, scratching my head, wondering how I'm going to get this deal done," Sahnger says.

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Lending standards crimping deals
Mortgage rates' trampoline act is just one problem he faces. The bigger challenge comes in the form of the ever-stricter standards that lenders are imposing. One frustration that he's facing more and more: Customers are blocked from refinancing because they have second-lien mortgages, such as home equity loans and home equity lines of credit.

For a refinance to be approved, the home equity lender has to reaffirm its second lien position. But some second lienholders are balking, and that causes refinance deals to fall apart.

Yet another frustration in the weird world of mortgages.