Mortgage rates fall to 26-month low
By Holden Lewis • Bankrate.com

Mortgage rates have hit their lowest point in more than two years, as Fed officials made it crystal clear that the central bank will cut short-term rates next week.

The benchmark 30-year fixed-rate mortgage fell 17 basis points to 6 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 0.35 discount and origination points. One year ago, the mortgage index was 6.08 percent; four weeks ago, it was 6.34 percent.

The benchmark 15-year fixed-rate mortgage fell 17 basis points to 5.68 percent. The benchmark 5/1 adjustable-rate mortgage fell 11 basis points to 6.1 percent. The 30-year fixed-rate jumbo mortgage, for home loans greater than $417,000, fell 12 basis points, to 7.12 percent.

The last time the 30-year fixed was lower was in late September 2005, when the benchmark rate was 5.97 percent. To the consternation of central bankers, the 30-year fixed had remained stubbornly below 6 percent for half a year, despite a series of Federal Reserve rate increases in 2005.

Weekly national mortgage survey

Results of Bankrate.com's Dec. 5, 2007, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

That was then, this is now
At the time, the national housing market was peaking. Hurricanes Katrina and Rita had recently hit the Gulf Coast less than a month apart, disrupting energy supplies and sowing fear that inflation would return, led by high fuel prices. Alan Greenspan, then-chairman of the Fed, was complaining that long-term interest rates were too low to keep inflation at bay, and he wanted them higher.

Greenspan got his wish. The 30-year fixed mortgage rate burst through 6 percent the next week, at the beginning of October 2005. Over the next 26 months, it never fell below 6.08 percent -- until now.

Economic conditions are different now. Back then, housing prices were near their peak; now they're still heading down. Back then, higher fuel prices led to fears of inflation; now higher fuel prices cause worries of an economic slowdown. Back then, the Fed was raising short-term rates; now the Fed is cutting them. Another rate reduction is expected Dec. 11.

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Loud hints at rate cut
Mortgage rates have fallen in seven of the last eight weeks, and have declined more than half a percentage point since the middle of August. That's about the same time that Fed officials started hinting that they would cut interest rates. They did so in the middle of September, then the end of October, and probably will cut again next week.

The Fed's chairman and vice chairman, Ben Bernanke and Donald Kohn, have given speeches hinting at a rate cut in the last week. So has Janet Yellen, president of the Federal Reserve Bank of San Francisco. In a speech Monday in Seattle, she said the economy perked up from April through September, but "the fourth quarter is sizing up to show only very meager growth."

She added that she supported the recent pair of rate cuts "so as not to fall behind the curve." Listeners interpreted her remarks to mean that she's inclined to want to stay ahead of the curve by favoring another rate cut.

Uptick in refis
With rates falling, there seems to be a modest increase in applications from homeowners who want to refinance their mortgages. Some 56 percent of applications last week were for refinances, according to the Mortgage Bankers Association.

Not only are rates at a two-year low, "there's that opportunity to refinance that ARM into a fixed rate," says Bob Walters, chief economist for Quicken Loans. According to the Mortgage Bankers Association, roughly eight in nine applications are for fixed-rate mortgages -- a sign that prudence is making a comeback.

Dan Dowling, president of United Mortgage Capital Corp. in Altamonte Springs, Fla., says, "We're definitely seeing a pickup in activity across the board -- both purchases and refinances."

He warns that for borrowers with credit scores below 680, mortgages will become more expensive soon. That's because mortgage giants Fannie Mae and Freddie Mac are introducing fees for people with fair credit -- not subprime, but not excellent, either.