15-year fixed now under 6%
By SAM GARCIA
6/28/2002

Mortgage rates continued to fall and appear to be headed lower still. The average 30-year fixed rate mortgage fell to 6.55%, down 0.08% -- or eight basis points (BPS) -- from last week according to Freddie Mac's weekly survey of 125 thrifts, commercial banks and mortgage lending companies.

"Corporate accounting concerns caused fierce investor buying of U.S. Treasury bonds, thereby lowering their yields," said Freddie's chief economist Frank Nothaft. "Other long-term interest rates followed in suit bringing fixed-rate mortgage rates within a slim margin of their 30-year record low set last November."

With an even more impressive showing, the average 15-year fixed rate mortgage fell nine BPS to 5.99%. The 15-year is now 0.56% better than the 30-year. During July of last year, the spread had been as narrow as 43 BPS.

Nearly two-thirds of Bankrate.com's panel of mortgage bankers, mortgage brokers and other industry experts expect for rates to decline further over the next five weeks. "Get ready for another drop on the mortgage rate roller coaster," said Bankrate.com's Greg McBride. "With the latest example of accounting chicanery, investors continue to seek safe haven, taking bond yields and mortgage rates still lower."

Reflecting some very attractive rates, applications for refinance mortgages jumped more than forty percent, according to the weekly survey of mortgage bankers, commercial banks and thrifts by the Mortgage Bankers Association of America (MBA). Overall applications were up almost 25%.

"We have felt that to ignite another boom, rates would have to break through the magic 6.5 percent barrier which they did the past week," said Doug Duncan, the chief economist for MBA. "If rates stay there for a time or fall more we will have another major wave of refinancing."

Freddie said the average one-year adjustable rate mortgage (ARM) edged up one BPS to 4.61%. MBA noted that last week's average loan size of $206,500 -- the largest on record -- was driven by Jumbo ARM refinances. While MBA said ARM applications now represent 18.6% of all applications -- the highest level since MortgageDaily.com began reporting rates -- a narrowing spread between fixed rates and the ARM is likely to push ARM activity down. In addition, fixed rates are falling so low that it is becoming harder for a consumer to justify the rate risk associated with an ARM.

While mortgage rates have benefited from recent accounting scandals at Enron, Tyco and WorldCom, one risk is that foreign investors will begin to sell U.S. Dollars at an increasing pace, driving rates higher even as the stock market continues to fall. John Rothfield, a senior currency strategist at Bank of America, said that if the dollar continues to fall, we may see some inflation in the U.S. economy. In addition, if foreign investors -- who have been big buyers of agency bonds over the past 3-4 years -- begin to pull out, agency bond yields may be pushed up, contributing to higher mortgage rates.

"There is some concern going forward that if the dollar were to have an additional decline, maybe even a fast-break decline, that that would start to impact the price and cost of mortgages," Mr. Rothfield told MortgageDaily.com. "We tend to think that if the Dollar falls a further 5% to 10% in a fairly managed and orderly way...then there's not really going to really be a problem." Mr. Rothfield noted that if the Dollar continues to decline, foreign central banks will become buyers of U.S. securities.

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