Spread between 15-yr & 30-yr widens
By SAM GARCIA
6/21/2002

A sour stock market has investors fleeing equity securities and flocking to Treasuries, driving already low mortgage rates lower. According to the latest weekly survey of 125 thrifts, commercial banks and mortgage lending companies by Freddie Mac, the average thirty-year fixed rate mortgage fell 0.08% -- or eight basis points (BPS) -- to 6.63%, its lowest point since last November.

Frank Nothaft, Freddie's chief economist said, "there is a flight to quality occurring at the present time with investors seeking refuge from the uncertainties of the Mideast and declining stock markets. This investment in US Treasury bonds lowers bond yields, causing other interest rates to follow suit, which explains the drop in mortgage rates to near record lows this week."

Freddie said the average fifteen-year fixed rate fell nine BPS to 6.08%. The bigger decrease in the 15-year average brought the spread between it and the 30-year to 55 BPS -- the widest its been since MortgageDaily.com began tracking the spread in 2000. The wider spread increases the attractiveness of the 15-year because of a quicker paydown for a moderately higher monthly payment.

The average 1-year adjustable rate mortgage (ARM) fell seven BPS to 4.60%, its lowest point since March 1994 according to Freddie. Low ARM rates helped pushed ARM activity higher. This week, the Mortgage Bankers Association of America (MBA) reported in its survey of mortgage bankers, commercial banks and thrifts that 18% of all applications were for ARM loans.

MBA said refinance applications rose more than four percent, while overall applications were up nearly two percent. Government applications actually edged down slightly.

The majority of mortgage bankers, mortgage brokers and other industry experts surveyed this week by Bankrate.com expect rates to stay within two BPS of their current levels during the next five weeks. Bankrate.com's financial analyst, Greg McBride, is a little more pessimistic about the direction of rates; "despite disappointing retail sales and consumer sentiment figures last week, subtle economic improvement hints at the inevitability of higher rates." However, McBride did note "it just won't be this month."

Increased recent violence in the Mideast is one of several factors making investors jittery and leading them to push Treasury yields lower. The Wall Street Journal reported that today is the fourth in a string of violent days that includes Palestinian suicide bombings, settlement infiltrations, Israeli military retaliation and other violence that has left 33 Israelis and 12 Palestinians dead.

The 10-year Treasury Note is up 8/32 at midday today, with the yield falling to 4.75%, according to LionInc.com.

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