Rising and falling rates
By Holden Lewis • Bankrate.com

It's a cliché to compare mortgage rates to a roller coaster. So how about comparing rates to the Demon Drop? That's the ride at northern Ohio's Cedar Point that goes straight up and then drops into free-fall.

One week after taking their biggest jump in 21 years, mortgage rates went into free-fall.

The benchmark 30-year fixed-rate mortgage fell 42 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 6.31 percent; four weeks ago, it was 6.32 percent.

The benchmark 15-year fixed-rate mortgage fell 47 basis points to 5.93 percent. The benchmark 5/1 adjustable-rate mortgage fell 12 basis points to 6.49 percent.

Weekly national mortgage survey

Results of Bankrate.com's Oct. 22, 2008, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

Mortgage rates' volatile behavior is part of the credit crisis. There have been wide swings in various interest rates and bond yields in the last few months, and mortgages aren't immune.

Three events are combining to push down on mortgage rates this week. First, governments and central banks in North America and Europe have been trying to loosen lending among banks, so that banks then will become more willing to lend to businesses and consumers. This week, that effort began to show results, as interbank lending rates fell.

Second, stock prices have been falling. Investors respond by pulling some money out of the stock market and buying bonds, including mortgage-backed securities. As a result, bond yields fall -- and mortgage rates follow.

Third, it becomes increasingly clear that the U.S. economy is in recession, and investors and economists are coming around to the idea that the recession will be deep and long-lasting. Interest rates tend to fall in recessions.

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Worse, then better
This week, the Mortgage Bankers Association had its annual convention. Unanimously, bankers and economists believe the real estate and mortgage industries will get worse before they get better.

"This is, so far, a moderate recession, but it could become more dramatic," said Ken Rosen, professor of real estate and urban economics at the University of California at Berkeley. He says this one is as deep as the downturns in the late '80s and early '90s and could get deeper than that.

Jay Brinkmann, chief economist for the Mortgage Bankers Association, says this recession will be the worst in at least 20 years by the time it's over -- and that's for the overall economy. For the housing economy, things look worse. In recent history, the pace of housing starts hit bottom at the end of 1981, when starts dropped to a seasonally adjusted annual rate of 541,000 units. Brinkmann predicts that this rate will fall to around 529,000 units in the second quarter next year.

"We expect that these numbers probably compare with the lows that we saw in the postwar period of the 1940s, is how much construction will fall," he said Tuesday.

Meanwhile, foreclosed houses will continue to be added to the inventory of homes for sale. Rosen believes that, nationwide, house prices will fall 20 percent, "and we're three-quarters of the way through that."

A few people appeared confident at this year's mortgage bankers' conference. Property auctioneers had a highly visible presence as they touted their ability to sell foreclosed properties. And companies that manage vacant, foreclosed homes seemed to be doing well, too.