Have mortgage rates hit bottom?

 

After falling to about 5% in just four months, rates snagged on refi wave

 Last update: 12:12 p.m. EDT March 18, 2009

SAN FRANCISCO (MarketWatch) — The Federal Reserve’s efforts to lower mortgage rates, generally considered successful on Wall Street and in the central bank’s own corridors, may have hit a wall as a surge in refinancing has discouraged lenders from lowering rates even more.

Benchmark mortgage rates, which have fallen nearly 1 percentage point since late November to a little over 5%, according to Freddie Mac’s survey of 30-year conventional mortgages, are likely to range between about 5% and 5.25% for the next several months, say some analysts. That’s low by historical standards, and a sharp drop from November’s levels before the Fed intervened directly in the mortgage market. But it’s higher than the 4.5% level that some analysts said late year was what was needed to ease U.S. housing woes and well above the 2% rate that is what some troubled borrowers may be able to negotiate under the government’s mortgage-modification guidelines. “It’s hard to make the case for a quantum leap below 5% given everything we are seeing now,” said Nancy Vanden Houten, an economist at Stone & McCarthy Research Associates. She anticipates rates could hover between 5% and 5.25% for a while. “I think it’s more or less found a bottom,” she said. At the same time, rates on mortgage-backed securities — the pooled mortgages that the Fed has been buying in an effort to drive down rates — have continued to fall, and by a greater degree, than consumer rates on mortgages. This means home buyers, while getting a lot of the benefit of the Fed’s purchases of mortgage-related securities, aren’t getting it all. Refi snagKeeping mortgage rates from falling further, Vanden Houten and others said, is a jump in refinancings this year as homeowners rush to take advantage of the slide in mortgage rates. After the Fed said it would buy mortgage-backed securities guaranteed or issued by Fannie Mae, Freddie Mac and other federal mortgage agencies in late November, these rates fell to as low as 4.96% in January from more than 6% in mid-November. But since then they have bounced as high as 5.25%. Lenders, already running short-staffed after slashing payrolls during the housing bust, have had little incentive to offer lower rates. “When originators are getting all the business they can handle, they don’t compete as aggressively on price,” said Arthur Frank, director of mortgage-backed securities research at Deutsche Bank Securities. Refinancings in January ballooned to their highest level since 2003. On Wednesday, the Mortgage Bankers Association said filings to refinance existing mortgages jumped about 30% last week. And this refinance wave could push mortgage rates to start rising again if the Fed doesn’t expand its current $600 billion program, Frank said. “Our expectation is that they will increase the size of the program,” Frank said. “If they don’t, in the second half, I think mortgage rates will go higher.” That’s because institutional investors are likely to demand higher rates on new mortgage-backed securities unless the Fed is present as a buyer. Refinancing demand is likely to continue this summer as a new federal program to help homeowners lower their monthly payments kicks in. The Fed may divulge plans to expand or alter its program to buy mortgage-backed securities on the open market when it issues a statement after its interest-rate-setting meeting Wednesday afternoon. Fed Chairman Ben Bernanke has pointed to the Fed’s push into the mortgage market, one of the nearly dozen unconventional programs it rolled out in the past 15 months to get credit flowing, as one of its successes. Buying mortgage-related securities “seems to have brought down mortgage rates significantly. It allows people to refinance and to get out of high-rate mortgages,” Bernanke said on CBS’ “60 Minutes” television show Sunday. Expansion of its mortgage-buying plans is more likely than a decision to buy Treasurys from the open market, another option the Fed is considering, said Drew Matus, economist at Bank of America-Merrill Lynch. “We do not expect the [Federal Open Market Committee] to commit itself to a Treasury purchase program at the meeting on Wednesday, choosing instead to expand its existing mortgage-backed securities program,” said Matus in a report Tuesday.
Mortgage rates fall, MBS more soThat program has helped made it cheaper for homeowners to take out new loans, triggering a rush of refinancings. Rates on 30-year, fixed-rate mortgages that qualify as conforming — or home loans that originators can sell to Fannie Mae and Freddie Mac (the limit is $417,000 but can go as high as $729,750 in high-cost areas) — fell to an average 5.03% in the week ended March 12, down just over 1 percentage point, since the week of Nov. 20, just before the Fed announced its program. Freddie Mac will release its next report Thursday. That decline shows the Fed’s program is working, central bank policymakers and several analysts say. “It has stabilized interest rates, which had been very erratic, and kept interest rates for conforming loans quite comfortable,” said Keith Gumbinger, vice president at HSH.com, which surveys financial companies on mortgage and other lending rates. The Fed engineered lower rates by buying securitized pools of these mortgages. Rates on these mortgage-related securities spiked in October after the collapse of Lehman Bros. prompted institutional investors to dump mortgage-related securities. There’s still some concern about holding mortgage-related bonds, notes Vanden Houten, and that’s another reason why mortgages rates may have hit a wall. Nonetheless, rates on 30-year mortgage-backed securities guaranteed by Fannie Mae — or the most liquid type of this debt — have fallen at a healthy clip in the past four months, narrowing 1.19 percentage points. That’s more than the drop in consumers’ mortgage rates.

“What the consumer gets in the mortgage market has come in, but not as much as” with mortgage-related securities, said Deutsche Bank’s Frank.

  By Laura Mandaro, MarketWatchLast update: 12:12 p.m. EDT March 18, 2009Laura Mandaro is a reporter for MarketWatch in San Francisco.