Mortgages Fall Back After Previous Gain

By Bankrate.com

Mortgage interest rates backed off a bit this week in the aftermath of a steep run-up that began a month ago and had continued through the week before. Rates remained higher, but "improved somewhat" compared with a week ago, says Jim Sahnger, a mortgage consultant at FBC Mortgage in Jupiter, Fla.

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The benchmark 30-year fixed-rate mortgage fell 7 basis points this week, to 5.16%, 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 5.11%; four weeks ago, it was 4.95%.

The benchmark 15-year fixed-rate mortgage fell 5 basis points, to 4.43%. The benchmark 5/1 adjustable-rate mortgage swam upstream, rising 4 basis points, to 4.05%. The benchmark 30-year jumbo fell 1 basis point, to 5.73%.

Future of Fannie, Freddie

The primary rate mover was the Obama administration's proposal for Fannie Mae and Freddie Mac, which presented three possible futures, all of which would reduce the two entities' involvement in the residential mortgage market.

The prospect of less government support for mortgage-backed securities triggered an increase in prices and decline in yields on current securities, according to David Basaleli, senior vice president at Guaranteed Home Mortgage Co. in White Plains, N.Y.

"They presented three options, and none of those three options would be helpful to mortgage rates in the long term," he says. "All indications are that any private mortgage investor coming into the market will demand a higher yield for the same mortgage bonds."

The proposal has a time horizon of nearly 10 years, so borrowers won't feel the impact immediately. But the anticipated eventual outcome could matter to those who take out a hybrid loan with an initial five-, seven- or 10-year term today.

"Without Fannie's and Freddie's involvement, borrowing costs are likely to be higher by the end of the decade, all else being equal," Basaleli says.

In a briefing this week, William Dudley, president of the New York Federal Reserve Bank, explained the rationale behind the Fed's quantitative easing program, which is intended to keep rates low and spur economic expansion.

"(V)iewed through the lens of the Federal Reserve's dual mandate -- the pursuit of the highest level of employment consistent with price stability -- the current situation remains unsatisfactory," Dudley said in the speech. "However, we appear now to be moving in the right direction."

The Fed's thinking seems to be that though economic activity appears to have increased, the gains, especially in employment, aren't yet strong enough to prompt a change in policy. That implies that interest rates might indeed remain relatively low for a while.

In other news, the Department of Commerce reported Tuesday that retailers posted a 0.3% gain in sales in January. That result, significantly weaker than analysts' expectations, suggested less risk of inflation and consequently bolstered the bond market, increasing demand, raising prices and lowering bond yields and interest rates. While mortgage rates don't track the bond market in perfect synchrony, the trends generally follow the same path.

Opportunity for Homebuyers

The sharp increase in mortgage rates since October, combined with the smaller tick downward this week, appears to have prompted buyers, at least those in Sahnger's South Florida community, to step up their searches for homes.

"We still have hurdles to overcome with regard to bank-owned inventory, but there does seem to be a turn in the number of people shopping for houses and the number of contracts being written," he says. "I'm very optimistic."

This week's rates were "a reprieve," and "there is potential room for an improvement in rates," Sahnger says, adding that today's buyers should recognize that the current rates may not be in effect throughout the traditional spring homebuying season.

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