UPDATE: Mortgage Rates Fall To A Record Low, May Be Headed Lower

24th Jun 2010 22:33

(Updates to swap out comment from Scott Wede; adds context). By Prabha Natarajan Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Mortgages rates last week fell to their lowest point in at least four decades, and market forces are pushing them even lower. The average rate on 30-year fixed-rate mortgages dropped to 4.69% in the week ending Thursday, down from 4.75% a week earlier and 5.42% at this time last year, according to Freddie Mac (FRE), the government-sponsored mortgage finance enterprise. That is the lowest since Freddie began tracking mortgages in 1971. Mortgage rates have been coming down thanks to a drop in U.S. Treasury yields, which are typically the benchmark for home-loan rates. Huge demand for Treasurys has sent prices up and yields down. That has been a boon for would-be borrowers, and even lower rates may be coming. "Mortgage rate needs to be at 4.5% with no points," said Scott Wede, managing director and head of agency mortgage trading at Barclays Capital, for a significant pickup in refinancing of existing home loans. Points are upfront interest payments offered to reduce interest rates. Many analysts had predicted rates would rise this year, as the economy picked up. But the recovery has been slower than forecast and investor demand for Treasurys--often seen as a safe haven investment--has soared. Mortgage securities, too, have been in demand, with prices hitting 15-year highs this week. Record-low rates is good news for homeowners looking to refinance and homebuyers eager to take advantage of slumping prices. The problem is, lenders are more strict about whom they will lend to, requiring larger down payments, higher credit scores and proof of job stability. So far, falling interest rates haven't spurred home buying, said Keith Gumbinger, a vice president at HSH Associates, a publisher of consumer loan information. "It's an important support but not the only one for homebuyers," he said. The current rate of unemployment, need to put down cash for a down payment, need for full documentation on income and assets, lack of confidence in current economy, and the difficulty in getting loans from banks all present hurdles to borrowers. "There are many pitfalls along the way for a homebuyer," Gumbinger said. Rates have also fallen on so-called jumbo loans that exceed government loan-purchase limits, which start at $417,000 and rise as high as $729,750 in the most expensive markets. Rates on 30-year fixed-rate jumbos averaged 5.65% on Tuesday, according to HSH. Many luxury-home builders depend on affordable jumbo loans to sell houses. Robert Toll, chairman of Toll Brothers Inc. (TOL), the nation's largest luxury-home builder, said Wednesday that because many of his customers are laying out deposits as high as 30% for homes in high-end markets, they can easily get jumbo loans on favorable terms. "If you're getting a jumbo that's in an expensive [market]...you're getting 4.5%, no points. That's not bad at all," he said. Wede, of Barclays Capital, said he expected the market would turn around if rates broadly fell to 4.5%, as he expects they will. "This will be the breaking point when we see some activity through new mortgages and refinancing of existing loans," he said. Mortgages that low would be an ironic development, because 4.5% was the unstated goal of the Federal Reserve's $1.25 trillion program to support the mortgage market by buying mortgages during the depths of the credit crunch. Under that program, the central bank bought mortgage securities guaranteed by Freddie and its sister agencies, Fannie Mae (FNM) and Ginnie Mae, in an effort to keep rates low. They did stay below 5% during the 15 months of the Fed program, but never reached the unofficial target of 4.5%. Much of the decline in mortgage rates is due to investor demand for mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie. Prices on these bonds shot up this week to the highest level in 15 years; since prices move inversely to yields, this has pushed down the cost of borrowing. Foreign investors and domestic banks are particularly enthusiastic for these securities, which are effectively guaranteed by the U.S. government but earn about 1.5 percentage points a year more than similarly safe Treasurys. Demand is expected to remain high, especially as investors try to stock up before June 30, which marks the end of the first half. "Mortgages are a high credit-quality product with better yields than Treasurys," said Dan Adler, portfolio manager at Smith Breeden. While they are not as much of a bargain as they were a month or two ago, he added, the remain a "rational alternative" to even pricier Treasurys. An added dynamic feeding market gyrations is a lack of new mortgage securities, caused by the slow pace of housing sales despite cheap home loans. Refinancing has also slowed because people who could easily qualify for new loans have already done so, while uncertainty on the job front and lower home valuations are proving to be stumbling blocks for others. Market participants said the only way to break this loop is for mortgage rates to drop to 4.5%. If that happens, there is likely to be a jump in refinancing as buyers of homes over the past two years look to get lower interest rates. At that point, prices of mortgage-backed securities will fall, yields will rise, and mortgage rates will start to climb again. -By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; [email protected] (Nick Timiraos also contributed to this report.) (END) Dow Jones Newswires June 24, 2010 17:33 ET (21:33 GMT)