Spread between 15 & 30-year jumps
By SAM GARCIA
12/7/2001

Mortgage loan applications for refinances fell back to September levels, reflecting last week's rising rates. The Mortgage Bankers Association of America (MBA) reported that refinance applications were down almost thirty percent from last week, according to its latest weekly survey of mortgage bankers, commercial banks and thrifts.

While refinances were down, MBA said applications for purchase money mortgages rose for the third straight week. Commenting on encouraging levels of consumer spending, Freddie Mac's chief economist Robert Van Order said, "coupled with low mortgage rates, this could indicate the housing industry will continue to be strong and stable in 2002."

MBA also reported that applications for Adjustable Rate Mortgages (ARM's) continued to make up a larger share of overall applications. While fixed rates have risen about 40 basis points (BPS) during the past thirty days, ARM's are actually down nine BPS for the same period. As a result of these opposite moves, the spread between the 30-year fixed rate mortgage (FRM) and the one-year ARM has widened from about 115 BPS 30 days ago to 1.63 percent this week. The wider, more attractive spread has pushed ARM activity to more than 11% of total applications, up from 8.30% a month ago, according to MBA.

Freddie Mac reported reported in its weekly survey of 125 thrifts, commercial banks and mortgage lending companies, that the average ARM was 5.21 percent, almost unchanged from last week. The 1-year ARM average was lowest in the Northeast region of the country, where it fell 19 BPS to 5.01%. The Northeast includes NY, NJ, PA, DE, MD, DC, VA, WV, PR, ME, NH, VT, MA, RI, CT and VI.

Freddie said the average 30-year FRM fell 18 BPS from last week to 6.84%. The Southwest region of the country saw a 23 BPS drop in the 30-year to 6.80%, the lowest average of any region. States located in the Southwest include TX, LA, NM, OK, AR, MO, KS, CO, NE and WY.

The average fifteen-year FRM fell 23 BPS to 6.30 percent. Because of a bigger drop than the 30-year, the spread between the 15-year and the 30-year FRM jumped to 54 BPS, or more than a half percent. This is about as wide as this margin has been this year, making the 15-year a more attractive alternative for consumers.

"Mortgage rates eased back this week, correcting the market overreaction to mixed economic indicators, which caused last week's big jump in rates," said Robert Van Order, Freddie Mac chief economist. "Financial markets remain quite volatile at present and this volatility will continue to influence mortgage rates through the end of the year."

While 40 percent of Bankrate.com's 100 "mortgage experts" believe rates will fall more than 2 BPS during the next 35-45 days, the majority of mortgage bankers, mortgage brokers and other industry experts surveyed believe rates will remain unchanged.

Greg McBride, Bankrate.com's financial analyst, said "a big bond sell-off Wednesday morning will offset the drop in rates seen over the previous week. However, Friday's employment report may shift the gears once again. Markets are volatile, and there is no assurance that rates will remain below 7 percent in the next 30 to 45 days."

"Markets are obviously skittish, but the payroll report on Friday should still come in on the weaker side," said Kurt Harrison, who is in U.S. Government Bond Trading at Banc of America Securities. "The Fed is still more likely to ease next week than not."

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