Fixed Rates Improve

Rates near year-ago levels, but apps way down
By SAM GARCIA
4/12/2002

While fixed mortgage rates improved last week, loan applications fell to their lowest point since January. According to government sponsored housing enterprise Freddie Mac, the average 30-year fixed rate mortgage (FRM) fell 0.14 percent -- or 14 basis points (BPS) -- from last week to 6.99%.

In its weekly survey of 125 thrifts, commercial banks and mortgage lending companies, Freddie said that the average 15-year FRM fell 15 BPS to 6.49%. The spread -- or difference between -- the 30-year and the 15-year stands at 0.50%.

"A shift in market perception about what action the Federal Reserve Board will take at its May meeting led to a downturn in interest rates this week," said Frank Nothaft, Freddie Mac chief economist. "Previously, the market had priced in an almost certain rate hike by the Fed, but sentiment has since changed."

Fixed rates were lowest in the West, where the 30-year FRM fell 19 BPS to 6.94% and the 15-year dropped 21 BPS to 6.45%.

Bankrate.com's financial analyst, Greg McBride, suggests taking advantage of current rates. "For those borrowers waiting on the fence to lock in when rates dip, this is the dip!"

While fixed rates are within 5 BPS of their year-ago levels, loan applications -- which the Mortgage Bankers Association of America (MBA) says fell nearly five percent from last week -- were down 25% from the same time last year. Government applications fell nearly ten percent from the prior week, according to MBA's survey of mortgage bankers, commercial banks and thrifts.

Adjustable rate mortgages (ARM's) were nearly unchanged, rising just one BPS from last week to five percent, Freddie said. However, since fixed rates fell, the spread between the 30-year FRM and the 1-year ARM dropped 15 BPS from last week to 1.99 percent. Reflecting previously wider spreads, ARM activity edged up to 15.6% of all applications from 15.2% last week.

According to Bankrate.com's survey of mortgage bankers, mortgage brokers and other industry experts , half of the respondents think rates will remain at their current levels while one-third see rates increasing more than 2 BPS during the next five weeks.

Freddie's Nothaft said, "consensus now is that the Fed will hold off raising rates until at least June.

"The Producer Price Index figures for March to be released on Friday will give a hint of what the Consumer Price Index will look like when it is released next week. Since mortgage rates are influenced by the threat of inflation, rates over the next few weeks will depend in great part on what these figures show."

"Rates are likely to rebound and trend higher with continued economic strengthening," said Bankrate.com's McBride. "A prolonged spike in oil prices may represent more of an inflation threat than an obstacle to economic recovery."

In an economic forecast released earlier this week, Freddie's Nothaft said, "a modest rate of inflation, coupled with a healthy economy, will enable long-term mortgage rates to remain at current low levels. Thirty-year FRM's have hovered within a narrow 0.5% band centered at 7% since mid-November, 2001, and this pattern should continue through the spring. As a matter of fact, the 30-year FRM is expected to average 7.1% in 2002."

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