Mortgage rates have fallen to their lowest level since May. But they're still higher than they were when the Federal Reserve started buying mortgage-backed securities to force rates lower.
The benchmark 30-year fixed-rate mortgage fell 12 basis points to 5.41 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 0.27 discount and origination points. One year ago, the mortgage index was 6.55 percent; four weeks ago, it was 5.65 percent.
The benchmark 15-year fixed-rate mortgage fell 9 basis points to 4.74 percent. The benchmark 5/1 adjustable-rate mortgage fell 1 basis point to 4.94 percent.
By any long-term perspective, today's mortgage rates are a bargain. Since the beginning of 2000, the 30-year fixed has averaged 6.42 percent in Bankrate's weekly survey, or almost a percentage point higher than today's average.
Weekly national mortgage survey
Results of Bankrate.com's Sept. 1, 2009, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
|30-year fixed||15-year fixed||5-year ARM|
|This week's rate:||5.41%||4.74%||4.94%|
|Change from last week:||-0.12||-0.09||-0.01|
|Change from last week:||-$12.40||-$7.67||-$1.00|
Fence-sitters lost outBut when you look back at recent history, today's rates don't look so hot. Less than a year ago, the real-estate and home-construction industries were pressuring the government to do something to bring mortgage rates down to 4.5 percent, and a lot of homeowners passed on refinancing at 5 percent because they were convinced that the rumors of impending 4.5 percent rates were true.
Those 4.5 percent rates were a mirage, unfortunately. But the Fed's efforts to reduce mortgage rates were the real thing. It was right around Thanksgiving when the Fed announced that it soon would buy mortgage-backed securities in a bid to send rates lower. About six weeks later, in early January, the Fed started buying them.
The week before the Fed's announcement in November, the benchmark 30-year fixed averaged 6.33 percent in Bankrate's Nov. 19 survey. Rates plunged below 6 percent the next week. Then, after the Fed started buying mortgage-backed securities in January, the 30-year fixed fell to 5.33 percent. The benchmark rate boing-boinged in the weeks and months after that, but it spent much of the spring below 5.25 percent.
Then it started creeping upward again. The upshot is that the 30-year fixed is higher now than it was when the Fed started pushing rates down in January.
More generous tax deduction?Paul Descloux, publisher of a mortgage application index called Mortgage Maxx, writes in his weekly analysis: "The Fed's roundabout and capital intensive mechanism to indirectly pull mortgage rates lower appears to have been harder to enact in practice than in theory. Mortgage rates are now higher than when the Fed started this alphabet soup while less than 10 percent of agency mortgage debt has been refinanced in '09."
It was clear that the Fed wanted to spark a refinancing boomlet. And there was one early in the year, but it fizzled quickly, for two reasons. First, there were all those people who sat on the fence, waiting for a 4.5 percent rate, as they watched refinancing opportunities pass them by. Second, and more important, homes lost value and owners no longer had enough equity to qualify for low-rate refinancing.
Descloux touts what he calls his Maxx Manifesto, in which he calls for the government to grant a temporarily more generous mortgage interest deduction on income taxes. Right now, borrowers deduct a dollar from their income for each dollar of mortgage interest that they pay. Descloux says it would help borrowers if they could deduct, say, $1.25 from taxes for every dollar paid in mortgage interest. Then taxpayers could adjust their withholding so less is taken out of every paycheck, and they could spend the extra money and stimulate the economy.
Did Fed succeed?It's an intriguing idea, but Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Stuart, Fla., says the Fed's handiwork deserves some respect, too. The Fed not only caused mortgage rates to fall but resuscitated the vital secondary market in mortgages.
"There was no market for mortgage-backed securities" when the Fed announced it would start buying them, Sahnger says. "If you go back to late October, it wasn't at all uncommon to see rates at 7 percent plus, with no (discount) points."
On top of that, he adds, there were big up-and-down swings in mortgage rates from day to day and even hour to hour. The Fed damped those rate oscillations.
Michael Becker, mortgage consultant for Green Pastures Mortgage & Finance in Lutherville, Md., offers another history lesson. "Remember when all of this started?" he says. "It was about getting toxic assets off balance sheets. None of that has been done. It's a year later -- how is it any different?"
For that and other reasons, Becker isn't convinced that the economy is in recovery. He expects rates to continue to fall.