Rates On Long-Term Mortgages Fall

 CHICAGO (MarketWatch) -- Long-term mortgage rates dropped sharply this week, while adjustable-rate mortgages barely budged from last week's averages, according to Freddie Mac's weekly survey released Thursday.

The 30-year fixed-rate mortgage averaged 5.87% for the week ending March 20, down from last week's 6.13% average. The mortgage averaged 6.16% a year ago. The 15-year fixed-rate mortgage averaged 5.27%, down from 5.60%. The mortgage averaged 5.90% a year ago.

But adjustable-rate mortgages barely moved. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.56%, down from 5.58% last week. The ARM averaged 5.91% a year ago. And 1-year Treasury-indexed ARMs averaged 5.15%, up just slightly from their 5.14% average last week. The ARM averaged 5.40% a year ago.

To obtain the rates, the 30- and 15-year fixed-rate mortgages required payment of an average 0.5 point, while the 5-year ARM required an average 0.9 point and the 1-year ARM required an average 0.8 point. A point is 1% of the mortgage amount, charged as prepaid interest.

"Mortgage rates fell this week as various actions were taken to improve market liquidity," said Frank Nothaft, Freddie Mac chief economist, in a news release. "In addition, the inflation report from the Consumer Price Index reflected weaker price increases than consensus expectations. Unchanged in February both including and excluding food and energy costs, it is the first time the core CPI did not report a monthly increase since November 2006."

Nothaft also said that the condition of the economy might be weaker than previously thought judging from retail sales figures that fell by 0.6% in February, contrary to the consensus forecast of a 0.2% increase.

"Slowing consumer spending and weak employment conditions are among the concerns behind the Fed's decision to lower the target federal funds rate by 0.75 percentage points in the most recent Federal Open Market Committee meeting," Nothaft said.

Market conditions have sent mortgage rates on a roller coaster ride since the beginning of the year. For the week ending Jan. 24, the 30-year fixed-rate mortgage plunged to a 5.48% average; by the last week of February, it averaged 6.24%, according to Freddie Mac.

Here are some possible reasons for the fall in home loan rates this week:

• The Bear Stearns announcements caused a scare in the stock market and shifted investor attention toward bonds.Yields on bonds go down when demand for them goes up, and mortgage rates often follow the yield trends of 10-year Treasury bonds.
• While there isn't a direct connection between the Fed's rate cut actions and the direction of mortgage rates, bond investors were likely relieved when the Fed cut less aggressively this week than the market had thought it would. That's because when the Fed lowers rates, it encourages more borrowing and spending -- which has the potential to cause inflation. Bond investors fear inflation because it means the purchasing power of their income stream will be reduced.
• The Office of Federal Housing Enterprise Oversight announced on Wednesday it was reducing Fannie Mae's and Freddie Mac's capital requirements, a move that is expected to add up to $200 billion of liquidity to the market for mortgage-backed securities.

Long-term mortgage rates could move even lower in coming weeks. Stay in touch with your mortgage advisor.