High Hopes

Recent mortgage rate decreases may be short lived
By SAM GARCIA
1/18/2002

While mortgage rates fell during the past week, the prospect for better rates remains dim in light of a strengthening economy. Mortgage giant Freddie Mac reported that the average thirty-year fixed rate mortgage (FRM) fell 23 basis points (BPS) from last week. Freddie said that the 30-year was lowest in the West, at 6.80 percent, and highest in the North Central, at 6.92 percent.

Freddie surveys 125 thrifts, commercial banks and mortgage lending companies each week to determine average mortgage rates.

"In his speech to the Bay Area Council Conference last Friday, Federal Reserve Chairman Alan Greenspan remarked that we were not out of the woods yet, leading the financial markets to suspect another rate cut may be in the offing," said Frank Nothaft, chief economist for the government sponsored housing enterprise. "This brought about this week's drop in interest rates in anticipation of such an event."

Freddie reported the average 15-year FRM was 6.31%, down 24 BPS from the prior week. The spread between the thirty-year and fifteen-year FRM edged wider by one BPS to 0.52%.

The average one-year adjustable rate mortgage (ARM) fell 18 BPS to 5.08 percent, according to Freddie's survey. Having been as wide as 1.91% during December, the spread between the 30-year FRM and the 1-year ARM has fallen to 175 BPS. However, the Mortgage Bankers Association of America (MBA) reported that ARM applications -- which represented 15.6% of total applications -- are at their highest level since October 2000.

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

The majority of the more than 100 mortgage bankers, mortgage brokers and other industry experts surveyed by Bankrate.com this week expect for rates to head down more than 2 BPS during the next 35 to 45 days. Bankrate.com's Greg McBride said, "dormant inflation and continued economic sluggishness, particularly in the manufacturing sector, mean there is no need for rate hikes anytime soon. Investors now expect low interest rates to stick around for awhile."

However, the outlook for a weak economy may be dimming; "recent data on the economy have been almost uniformly positive," a Lehman Brothers' economist was quoted as saying in the interactive edition of the Wall Street Journal. Lehman is reportedly still looking for another Fed rate cut this month, but whether one actually occurs "is becoming an increasingly close call" due to a well-positioned economy.

That story went on to quote San Francisco Fed President Robert Parry as saying that he "cannot rule out flat or slight growth in the first quarter and positive growth in the second quarter. I'd have to say economic recovery could begin any time in the first half of the year."

This compares with recent cautious comments from a series of Fed governors that, as Banc of America Securities' Kurt Harrison previously noted, "seems to indicate that rates still have room to fall further."

MBA reported that total loan applications were about 2% higher than last week. Refinance applications, which are more than 30 percent down from a year ago, were up 13.7% from last week. Refinances represented 54% of total applications, compared to a year ago when they represented 64 percent.

MBA said that purchase applications, which were 4.7% higher than a year ago, fell this week by almost eight percent. However, the Housing Market Index, which is derived from a monthly survey of builders about current single-family home sales and expectations for the next six months, was reported by the National Association of Home Builders at 7% higher than December. Freddie's Nothaft commented, "the Home Builders' housing market index rose to its highest level in over a year this month due to continuing low mortgage rates."

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