|Mortgage rates reverse
course, drop sharply
Mortgage rates dropped dramatically this week in an
abrupt shift following a two-month rise.
The benchmark 30-year, fixed-rate mortgage fell 11
basis points to 6.31 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 0.31 discount and origination points. One year ago, the mortgage
index was 6.32 percent; four weeks ago, it was 6.24 percent.
The benchmark 15-year, fixed-rate mortgage fell 11
basis points to 6.08 percent. The benchmark 5/1 adjustable-rate
mortgage fell 13 basis points to 6.17 percent.
Before this week, the average
30-year fixed had risen seven out of eight weeks -- and it remained unchanged
during the one week when it didn't go up. That two-month rise followed a six-week
period when rates fell every week.
|Weekly national mortgage survey
|This week's rate:||6.31%||6.08%||6.17%|
|Change from last week:||-0.11||-0.11||-0.13|
|Change from last week:||-$11.87||-$9.85||-$13.95|
Feds kick off shift in attitude
Bond yields have fallen steadily for a week, bringing mortgage rates down with
them. The Federal Reserve kicked things off Jan. 31, when it kept short-term interest
rates unchanged and issued a benign assessment of the economy. "Readings
on core inflation have improved modestly in recent months and inflation pressures
seem likely to moderate over time," the central bank said. Investors paid
more attention to that than to the next sentence, which warned that low unemployment
could "sustain inflation pressures."
of falling inflation caused bond yields and long-term mortgage rates to drop.
A week after the Fed meeting, the Labor Department announced that workers boosted
their productivity by a surprisingly strong amount in the final three months of
2006. Productivity rose by a 3 percent annualized rate in the fourth quarter,
better than the 2 percent that many economists had expected.
Strong productivity gains put a lid on prices, and the prospect of reduced inflation
pushes long-term interest rates downward. The productivity report wasn't altogether
promising. In 2006, productivity gained by 2.1 percent, the lowest annual rise
since 1997. Wages and benefits grew faster than productivity. Viewed from that
perspective, inflation doesn't look defeated at all. But bond investors were taking
the short view, not the long view. They saw a big jump in productivity for three
months, so bond yields dropped and so did mortgage rates.
The drop in rates hasn't produced a legion of refinancers, says Brian Peart, president
of Nexus Financial, a mortgage brokerage in Atlanta. "The rates dipped even
lower than today a few weeks back, and then they went back up," Peart says.
Indeed, the average 30-year fixed fell to 6.08 percent in the first week of December.
Then came that eight-week rise, when the 30-year fixed topped out at 6.42 percent
"There's some refinancing out there, but people
aren't actively looking for it," Peart says. Most of his company's business
comes from home buyers, not homeowners who are refinancing. Peart adds that "a
ton of people" have interest-only loans who might benefit from refinancing
before the interest rates on their loans are adjusted upward.
According to mortgage financing giant Freddie Mac, most
refinancers aren't taking advantage of lower rates. They're refinancing to cash
out the equity from their homes. In a "cash-out refi," the homeowner
refinances the mortgage and gets a new loan for more than the amount previously
owed. The borrower gets the difference in cash, to be spent on anything from paying
off credit card debt to financing a gambling spree.
Freddie Mac-owned mortgages that were refinanced in the final three months of
2006, 84 percent were cash-out refis. Here's the surprising part: Most people
were refinancing to a higher interest rate -- about three-eighths of a percentage
Amy Crews Cutts, a Freddie Mac economist, speculates
that a lot of these borrowers were paying off higher-rate debt, such as home equity
lines of credit at 8.25 percent.