Outlook for mortgage rates unclear
By SAM GARCIA
8/2/2002

Previously falling mortgage rates have helped propel mortgage loan applications to their highest levels since last year. However, a jump in rates this past week in addition to an unclear outlook about where rates are headed may weaken the swell in this latest refinance wave.

Total mortgage loan applications jumped 23% from last week, fueled by a 35% surge in refinance applications, according to the Mortgage Bankers Association of America (MBA). Refinances accounted for 67.6% of all applications -- the highest level since November. Purchase applications edged up less than three percent, MBA reported, and conventional applications were up nearly 25%.

"As many major stock indices bottomed early last week and recovered throughout the remainder of the week, many consumers perceived that interest rates had also bottomed and may head back up," said MBA economist Phil Colling. "The large increase in the Refinance Index last week was likely caused by consumers scrambling to take advantage of the low mortgage rates before any perceived or real rate increases."

MBA says its survey of mortgage bankers, commercial banks and thrifts covers approximately 40 percent of all U.S. retail residential mortgage originations.

Falling rates had been driving the recent refinance wave; however, rates reversed direction this past week, with the average 30-year fixed rate mortgage jumping 0.09% -- or nine basis points (BPS) -- from the prior week to 6.43%, according to mortgage giant Freddie Mac.

"As the stock market rallied this week, investors pulled some money out of Treasuries, pushing up bond yields," said Frank Nothaft, Freddie's chief economist. "This resulted in slightly higher interest rates."

Freddie's most recent survey of 125 thrifts, commercial banks and mortgage lending companies indicated that the average 15-year fixed rate mortgage was up only 8 BPS, widening the spread over the 30-year to 0.59%. This is the widest the spread has been since MortgageDaily.com began covering mortgage rates.

The average 1-year adjustable rate mortgage (ARM) shot up 14 BPS to 4.45%. Even as the spread between the ARM and the 30-year fixed rate has fallen to 1.98% from as high as 2.14% in April, the share of ARM applications has risen to 18.8% -- the highest level since mid-2000.

Mortgage rates are likely to either rise or remain unchanged, according to Bankrate.com's survey of mortgage bankers, mortgage brokers and other industry experts. Forty percent of those surveyed expect no change, while another forty percent see rates increasing.

Freddie's Nothaft said recently released indicators, including a weaker than expected second quarter Gross Domestic Product, "reduces the risk of inflation and should lessen the upward pressure on interest rates. However, there is so much volatility in the market right now, the situation could easily change at any time, making it difficult to predict where mortgage rates will (be) next week."

Mortgage rates may feel upward pressure due to planned increases in borrowing by the Treasury Department. According to a recent article in the Washington Post, the Treasury Department said it plans to borrow $76 billion in the July-September period, $21 billion more than projected three months ago. Falling tax receipts and rising spending are boosting the budget deficit. During the second quarter, the Post said the Treasury hoped to pay down $89 billion in debt but ended up borrowing $15 billion.

Near midday today, the 10-year Treasury Note was up 17/32, with the yield down to 4.32 percent, according to LionInc.com.

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