Mortgage Rates Down Even Before The Fed Halts Rate Increases

Mortgage rates dropped again during the week ended August 3 and August 4, and with the announcement on August 8 that the Federal Reserve has, for the moment at least, stopped its regular lock step quarter-point increases in the federal funds rate, there is reason to hope that home mortgage rates will continue to ease.

In a press release on Tuesday, the Federal Reserved stated that "Economic growth has moderated from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices."

"...the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, (these pressures) seem likely to moderate over time."

Thus after hiking the rate at every meeting since June 2004, the Fed opted to leave the federal funds rate at 5-1/4 percent, at least until its next meeting in September.

The federal funds rate only indirectly impacts mortgage rates, but the expectation that the Federal Reserve would pause if not halt increases has been cited as one factor in the easing of mortgage rates the last two weeks.

Freddie Mac in its Weekly Primary Mortgage Market Survey reported that the 30-year fixed-rate mortgage had dropped 9 basis points to 6.63 percent with fees and points unchanged at 0.3. This is the lowest average rate since the week ended June 15. The 15-year fixed-rate mortgage dipped from 6.34 percent to 6.27 percent and fees and points were also down from 0.4 to 0.3.

The 5/1-year adjustable rate mortgage lost 8 basis points, averaging 6.27 percent for the week with fees and points unchanged at 0.4 and the one-year ARM decreased from 5.78 percent to 5.69 percent with fees and points unchanged at 0.7.

Freddie Mac spokesperson Frank Nothaft, vice president and chief economist, credited decreasing inflationary pressures, quoting recent economic news such as the second quarter Gross Domestic Product (GDP) report which came in weaker than the market had expected, indicating that inflation is less of a threat which translates into lower mortgages rates. "Although lower rates," Nothaft said, "are a welcome sight, we still feel that the 30-year fixed-rate mortgage rate will drift up and down somewhat over the next few months but will average less than seven percent for the year."

The Mortgage Bankers Association Weekly Mortgage Applications Survey also showed across-the-board rate declines. The average contract interest rate for 30-year fixed-rate mortgages were down from 6.62 percent to 6.45 percent with points increasing marginally from 1.0 to 1.01. Points in this survey include the origination fee and all statistics are for conventional 80 percent loan to value mortgage originations.

15-year fixed-rate mortgages dropped a substantial 18 basis points to 6.10 percent although points were up from 1.0 to 1.09 for the week. The average contract interest rate for one-year adjustable rate mortgages decreased even more - from 6.18 percent to 5.96 percent. Points decreased from 0.81 to 0.80.

Mortgage activity increased during the week; the Market Composite Index, a measure of loan application volume, increased 4.9 percent on a seasonally adjusted basis and 4.3 percent unadjusted from the previous week but was still registering a much lower volume than the same week in 2005 - off 24.9 percent.

Refinancing as a share of all mortgage activity rebounded, increasing to 38 percent of all applications from 37 percent a week earlier but adjustable rate mortgages were down a fraction from 27.8 to 27.6 percent of all loan applications.

In a separate report Freddie Mac stated that Americans are continuing to take equity out of their homes in the form of cash.

During the second quarter of 2006, 88 percent of mortgages owned by the corporation that were refinanced resulted in new mortgages with a loan amount more than five percent higher than the loans they were replacing. This is the highest share of cash-out refinances since 1990. Economist Nothaft credited both incentives for cash-out refinancing but also the number of ARMS that will be adjusting in the near future for fueling the refinancing boom. Freddie Mac estimates that $500 billion in first mortgages will adjust this year and another $650 billion in second mortgage liens (second mortgages and home equity lines) will see at least one rate change this year.

Not all of the refinancing, however, can be attributed to a fear of rate increases. One half of borrowers who paid off one loan with another had an interest rate on the old loan that was at least 7 percent lower than the new rate.