Mortgage rates dropped this week, halting a three-week rise.

The benchmark 30-year fixed-rate mortgage fell 14 basis points this week, to 5.21 percent, according to the 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 0.38 discount and origination points. One year ago, the mortgage index was 5.18 percent; four weeks ago, it was 5.07 percent.

The benchmark 15-year fixed-rate mortgage fell 13 basis points, to 4.56 percent. The benchmark 5/1 adjustable-rate mortgage fell 7 basis points, to 4.48 percent.

Weekly national mortgage survey
Results of’s April 14, 2010, 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: 5.21% 4.56% 4.48%
Change from last week: -0.14 -0.13 -0.07
Monthly payment: $907.05 $1,267.30 $834.07
Change from last week: -$14.33 -$11.02 -$6.87

Low rates to hang around?

Some mortgage professionals think lower rates may last a while.

“People think the (economic) recovery is happening, but it’s not happening,” says Michael Moskowitz, president of Equity Now, a mortgage bank based in New York City. “Inflation is down, the recovery is not as strong as they think it is, the market’s up. I just think that we are in for five, 10 years of quote-unquote ‘Japan,’ and that means lower rates.”

Moskowitz’s reference to Japan might be obscure to those of us whose tastes run more toward “American Idol” than “Mad Money with Jim Cramer.” Japan’s Lost Decade, a period of economic stagnation in the 1990s, happened after the bursting of bubbles in stocks and real estate.

If the United States goes through a similarly long slump, interest rates could remain low for years.

But that doesn’t explain why rates fell this week. Scott Simon, managing director for PIMCO, the global investment management firm, has a theory: Private investors are satisfying pent-up demand for mortgage-backed securities.

Pedal power

To keep mortgage rates down, the Federal Reserve bought $1.25 trillion in mortgage-backed securities over 15 months, ending March 31. In essence, the Fed bought nearly all the conforming mortgages that were available. With the central bank functioning as an eager mortgage lender, rates remained low.

The mortgage market was like a kid learning to ride a bicycle, with the Fed providing a steadying hand. When the Fed let go, private investors kept pedaling.

“Investors knew exactly when the program was going to end and how much the Fed was buying,” Simon says. “So it’s not as if anybody woke up and was surprised by the fact that the Fed had stopped buying.”

Simon adds that the Fed didn’t buy only newly issued mortgage-backed securities. The central bank ended up buying about $400 billion of previously existing mortgage securities from private investors.

Those investors are now “underweight mortgages,” Simon says — to meet investment objectives, they need to buy mortgages. As they do so, they will keep rates down and cut off any rapid rises in mortgage rates.

Even with the homebuyer tax credits set to expire at the end of April, applications for home loans are down, according to the Mortgage Bankers Association.

The MBA attributes dwindling loan applications to at least two factors. First, that rates rose about a quarter of a percentage point in the three weeks before this week’s rate drop. Second, the Federal Housing Administration increased its upfront mortgage premium. The FHA’s higher fee amounts to $500 for every $100,000 borrowed.

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