Japan Crisis, Fed Send Mortgage Rates Down

Mortgage interest rates dipped again this week, driven lower by world crises and Tuesday's statement from the Federal Reserve. The lower rates presented an opportunity, however brief, for home-loan borrowers, given a general sense that rates should be on the rise as the U.S. economy improves.

The benchmark 30-year fixed-rate mortgage fell 13 basis points to 4.91%, according to the Bankrate.com national survey of large lenders. The last time it was below 5% was Jan. 27. A basis point is one-hundredth of 1 percentage point. The mortgages in the survey had an average total of 0.38 discount and origination points. A year ago, the mortgage index was 5.07%. Four weeks ago, it was 5.16 percent.

The benchmark 15-year fixed-rate mortgage dropped as well, losing 20 basis points to hit 4.12 percent, while the benchmark 5/1 adjustable-rate mortgage fell 14 basis points to 3.74%.

Flight to Quality

The massive earthquake and subsequent tsunami in Japan and violent uprising in Libya might seem a world away from U.S. home loans, but in fact, these international events have a significant though circuitous and indirect effect on mortgage interest rates, says Jim Pomposelli, a mortgage banker at Mortgage Direct in Chicago.

Here's how it works: Negative events trigger fears about adverse impacts on the global and U.S. economies. Those fears prompt investors to leave the stock market and move their money into U.S. Treasuries and mortgage-backed securities. This behavior, called a "flight to quality," increases the demand for Treasuries, which results in lower prices and higher yields, or rates.

This week, investors behaved exactly that way. Then seemingly realizing their fears might have been overblown, they ditched the safer investments and returned to equities, only to regroup again and start the cycle over.

Meanwhile, lenders lowered and raised rates, sometimes within the course of a single day.

"It's all event-driven," Pomposelli says. "It's all a flight to quality and then it's unwinding that flight to quality as investors start to realize that the long-term economic impact, when they really look at it all, is not as bad."

Fed Wants More Jobs

In related news, the Federal Reserve this week announced that it will keep its target range for the federal funds rate between zero percent to 0.25 percent and stick with its plan, known as quantitative easing, or "QE2," to purchase $600 billion of longer-term Treasury securities by the end of June.

This stay-the-course mentality might have more to do with job creation than inflation, Pomposelli says. That has given investors, rather than the Fed, a greater influence over longer-term interest rates such as those on mortgage loans.

"I would argue that it's investors who are driving the 10-year Treasury, and subsequently, mortgage-backed securities because they are more concerned about inflation than the Fed is," he says. "But all this goes out the window when -- just think of the events that we've had -- (you have) something in Saudi Arabia, something in Bahrain, and then, you have Tokyo now. There's a lot of knee-jerk reaction and tremendous volatility."

Low rates help housing

Housing, which depends largely on employment, also may be on the Fed's mind, says Don Frommeyer, senior vice president of Amtrust Mortgage Funding in Indianapolis.

"The federal government understands that part of the (economic) recovery is housing and to keep things rolling, they have to keep housing affordable," he says. "Remember, every time that rates go up half a point, you just lost a huge percentage of the people who can buy a house."

Indeed, the Fed's statement noted that "the housing sector continues to be depressed."

Taken together, the global crises, jobless recovery and weak home sales hint that lower mortgage interest rates may stick around for a while, though the strengthening U.S. economy augers exactly the opposite.