mortgage

Mortgage rate analysis: Nov. 27, 2008

Thanks to Uncle Sam, mortgage rates plummeted this week.

The Federal Reserve announced Tuesday that it will buy up to $500 billion worth of mortgage-backed securities over roughly the next year-and-a-half. The Fed's shopping spree won't begin until next month, but the mere announcement of it was enough to send mortgage rates below 6 percent.

The benchmark 30-year fixed-rate mortgage fell 36 basis points to 5.97 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 0.13 discount and origination points. One year ago, the mortgage index was 6.17 percent; four weeks ago, it was 6.77 percent.

The benchmark 15-year fixed-rate mortgage fell 26 basis points to 5.75 percent. The benchmark 5/1 adjustable-rate mortgage rose 9 basis points, to 6.27 percent.

Fixed mortgage rates plunged immediately after the Fed declared that it would buy mortgage-backed securities. For a brief period Tuesday, well-qualified borrowers could get 30-year, fixed-rate mortgages at 5.25 percent. When rates drop abruptly, there's usually a rebound, and that's what happened in this case. Rates yo-yoed up and down Tuesday and Wednesday. Bankrate's survey probably caught rates on one of the upswings, as 30-year rates remained comfortably below 6 percent.

How long will it last?

At a time of market turmoil, it's impossible to forecast rates, so no one can predict how long the 30-year fixed will stay below 6 percent. But the Federal Reserve's explicit goal was to push rates down and keep them there to stimulate home-buying. "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said in its announcement.

You can see that the Fed did not mince words. In contrast to many Fed pronouncements, this one was perfectly clear: The central bank is pushing down mortgage rates so people will buy houses. Most homebuyers look at houses for weeks or months before signing a purchase contract, which the Fed well knows. If the Fed wants to goose home sales, it will have to keep rates low for months -- and by waving around a $500 billion wad of cash, the Fed has demonstrated the capacity to do so.

In the last couple of weeks, yields on 10-year Treasury notes had been falling. In a normal market, mortgage rates would fall roughly the same amount as 10-year Treasury yields. But that didn't happen this time, because investors are worried about foreclosures. By buying mortgage-backed securities, the Fed will bring rates closer to Treasury yields.

Right now, says Bob Walters, chief economist for Quicken Loans, the Fed is "fighting a nine-front war, and this is one of the other fronts, which is that mortgage interest rates were not enjoying the same level of reduction as other rates."

The Fed's $500 billion club has been an effective weapon, so far.

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