Rates may fall further
By SAM GARCIA
6/3/2002

Mortgage rates headed down last week, with the one-year adjustable rate mortgage (ARM) leading the way. According to the most recent survey of 125 thrifts, commercial banks and mortgage lending companies by Freddie Mac, the average one-year ARM fell 0.09% -- or nine basis points (BPS) -- from the prior week to 4.76%.

The thirty-year fixed rate mortgage was down 5 BPS to 6.76%, and the fifteen year moved down six BPS to 6.22%, according to Freddie. Frank Nothaft, chief economist for the government sponsored housing enterprise, said "slower economic growth this quarter and little or no inflation worries allowed rates to drift downward these last few weeks."

Reflecting the previous week's shrinking spread between the ARM and the 30-year fixed, ARM activity fell to 17.0% of total applications from 17.5% the prior week, according to the Mortgage Bankers Association of America (MBA). ARM activity was at its highest level in years last week. Freddie's Nothaft said, "interest in the 1-year ARMs has been rekindled, as the ARM rates of the last few months rival those of six years ago."

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

Overall applications were up nearly three percent, MBA reported, and refinance applications were up more than five percent. Applications for government loans were down slightly.

HSH Associates, which says it surveys over 2,000 lenders each week, noted "there are several significant events" currently influencing mortgage rates. These include India and Pakistan; Israel and the Palestinians; terrorist threats; poor equity market; and the lack of a significant economic recovery. HSH said these events, in addition to poor prospects for significant gains, will help money managers and individual investors develop an appetite for mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae, driving yields and mortgage rates down.

The majority of mortgage bankers, mortgage brokers and other industry experts surveyed by Bankrate.com don't see rates changing over the next five weeks.

In an article entitled, "Market Awaits Potential Hedging Avalanche In Tsy Futures," Dow Jones Newswires (DJN) reported that the uptick in mortgage refinancings could cause mortgage providers to increasingly use Treasury call options to cover their greater risk of prepayment. Sadakichi Robbins, head of global fixed-income trading at Julius Baer, reportedly estimates that below the 4.95% yield on 10-year notes, convexity trades - as this sort of interest rate hedging is called - by mortgage providers would become "self-perpetuated."

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