In a See Saw Year Mortgage Rates Finish 2005 Higher

While fixed rate mortgage rates declined for the third straight time in Freddie Mac's Weekly Primary Mortgage Market Survey for the week ending December 29, they had traveled a modest difference from where they started the year. Adjustable rate mortgages also declined slightly during the last full week of the year, but their increase from January 2005 levels was substantial.

First, the weekly report for both Freddie and the Mortgage Bankers Association Survey for the week ending December 30.

Freddie reported that the 30-year fixed mortgage was down from 6.26 percent for the week ended December 22 to 6.22 percent with fees and points dropping 0.1 to 0.5. The 15-year declined three basis points to 5.75 percent with fees unchanged at 0.6. The 5/1 ARM was also off slightly at 5.79 percent, three basis points lower than the previous week with fees and points down 0.1 to 0.6. The 1-year ARM showed the largest change, dropping from 5.22 percent to 5.15 percent with fees and points remaining at 0.7.

The Mortgage Bankers Association also reported that most rates declined. The 30-year fixed was off 6 basis points from 6.21 to 6.15 percent. But points, including the origination fee were way up - at 1.32 from 1.18 for 80 percent loan to value originations. 15-year fixed mortgages were down slightly from 5.76 to 5.74 percent with points up to 1.25 from 1.20. One-year ARMS, however, increased to 5.41 percent from 5.36 percent a week earlier. Points edged down to 0.92 from 0.98.

Mortgage application volume decreased 1.5 percent on a seasonally adjusted basis which included an additional adjustment for the holiday week. On an unadjusted basis the Market Composite Index was down 20.8 percent from the previous week and 9.9 percent compared with the same week one year ago.

Refinance activity went up slightly to 42.7 percent of all activity from 40.2 percent the previous week while the share of mortgage applications attributable to adjustable rate mortgages decreased to 28.8 percent from 32.5 percent a week earlier.

Looking at year-end comparisons, Freddie Mac's figures for the most recent week are down slightly from the highs of 2005, all of which have occurred in the last two months. Three of the four rates tracked by Freddie hit the year's high during the week ended November 17 with the 30-year at 6.37 percent, the 15-year at 5.90 percent, and the 5/1 ARM at 5.86 percent. The 1-year ARM topped out for the year only one week ago, hitting 5.22 percent for the week ended December 22.

While the year has been a rate rollercoaster, the general trend has been two steps up and one down for most of the year. Fixed rate mortgages did not increase substantially after all of the ups and downs - the 30-year gained 0.45 since the first week of the year, and the 15-year increased .55. Based on these average rates the payment on a $200,000 mortgage would have increased from 1,170 (P&I) for the week ended January 6, 2005 to $1,227 by last week for the 30-year and from 1,603 to 1,662 for the 15-year. The increase in payments by $50 to $60 dollars on these fixed rate products probably has not had a lot of impact on the plans of most prospective homebuyers or those refinancing existing loans.

However, the two adjustable rate mortgages tracked by Freddie showed substantially larger increases over the year. The 5/1 hybrid was up three-quarters of a point since early January and the 1-year climbed more than a full point. This represented a $95 per month higher payment on our hypothetical $200,000 mortgage - from $1,077 to $1,172 for a 5/1 and $126 more for the one-year ARM, bringing that payment to $1,092.

Even more striking is the flattening of the yield curve. Adjustable rate mortgages have lost much of the advantage they have held over fixed rate products, particularly for those home buyers or refinancers who are squeezing to qualify for a loan. The difference between payments on a $200,000 30-year fixed mortgage and a 1-year ARM dropped from $205 per month in January to $135 last week. One would suspect that for all but the most cash-pressed, the security of a fixed rate would more than compensate for the dollar difference.

Rates for the New Year are expected by most analysts to rise but to do so in a measured way, finishing the year around 6.5 percent for the 30-year fixed. If realized, this would mean a smaller increase this year than last. The stated intention of the Federal Reserve, according to the minutes of their December meeting, to sit back for a while before continuing the monthly rate increases we have seen throughout 2005 may make that 6.5 percent number very possible; it may at least return ARMs to respectability as short-term rates take a breather.