mortgage

Rates fall again to new low

Mortgage rates fell slightly this week, to the young year's lowest point.

The benchmark 30-year fixed-rate mortgage fell 4 basis points this week, to 5.08 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 0.42 discount and origination points. One year ago, the mortgage index was 5.37 percent; four weeks ago, it was 5.15 percent.

The benchmark 15-year fixed-rate mortgage fell 3 basis points, to 4.43 percent. The benchmark 5/1 adjustable-rate mortgage was up 1 basis point, to 4.47 percent.

Bankrate conducts its rate survey every Wednesday. Since the Jan. 20 survey, the benchmark 30-year fixed hasn't been higher than 5.15 percent or lower than 5.08 percent. This era of rate tranquility could expire by the end of March, when the Federal Reserve stops buying mortgage-backed securities.

Weekly national mortgage survey
Results of Bankrate.com's March 10, 2010, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
30-year fixed15-year fixed5-year ARM
This week's rate:5.08%4.43%4.47%
Change from last week:-0.04-0.03+0.01
Monthly payment:$893.84$1,258.87$832.11
Change from last week:-$4.06-$2.53+$0.98

The Fed is in the final three weeks of a mortgage-buying initiative that began more than a year ago. In all, the Fed plans to buy $1.25 trillion in mortgage-backed securities. The central bank is down to the last $30 billion or so of these purchases. Afterward, it will be up to investors to buy mortgages and keep home loans available.

For a while, the consensus among bankers and economists was this: Mortgage rates would rise roughly half a percentage point after the Fed's withdrawal. That consensus of an expectation of higher rates has transformed into uncertainty.

"Are we going to see a half-point blip? I don't know. Maybe. Possibly. Probably. I don't know," says Dick Lepre, senior loan consultant for Residential Pacific Mortgage, in San Francisco. If the Fed's withdrawal means that rates are going to rise, why haven't rates gone up already?

Even members of the Fed are asking that question, which implies that they are uncertain about the direction of mortgage rates, too. Brian Sack, executive vice president of the New York Fed, said in a speech Monday that the central bank has been tapering its purchases of mortgage-backed securities. "However, even as the pace of our purchases has slowed, longer-term interest rates have remained low," Sack said, and the gap between mortgage rates and Treasury yields has remained narrow.

"This pattern suggests that the effects of the purchases have been primarily associated with the stock of the Fed's holdings rather than with the flow of its purchases," Sack continued. "In that case, the market effects of the purchase program will only slowly unwind as the balance sheet shrinks gradually over time."

In other words, Sack believes that mortgage rates are low because the Fed has bought more than a trillion dollars' worth of home loans, not because the central bank is buying a certain amount of mortgage-backed securities every week. And that implies that rates won't necessarily rise rapidly after the Fed withdraws.

For his part, Lepre is more certain about something else: After the Fed stops buying mortgage-backed securities, rates on mortgages will be volatile. That is, they might move up and down in big chunks during the day. These up-and-down moves might pretty much cancel each other out over a day or week or month, albeit with a long-term, upward trend. It won't be a relaxing ride for borrowers who are trying to decide whether to lock or float.

"I think we're going to return to greater volatility simply because the Federal Reserve is not there to take up the slack in case there's no participants (in the market), and that's going to be annoying to people who are concerned about locking interest rates or not locking interest rates," Lepre says.

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