Pressure on Mortgage Rates Eases

Fed chairman says unemployment remains a concern


After climbing for two weeks in a row, mortgage rates reversed course this week, with rates on 30-year fixed-rate loans again below 4 percent after Federal Reserve Chairman Ben Bernanke voiced worries about persistently high unemployment.

Freddie Mac’s Primary Mortgage Market Survey showed rates on 30-year fixed-rate mortgages averaged 3.99 percent with an average 0.7 point for the week ending March 29, down from 4.08 percent last week and 4.86 percent a year ago. Rates on 30-year fixed-rate mortgages hit an all-time low in records dating to 1971 of 3.87 percent during the first three weeks of February.

Rates on 15-year fixed-rate mortgages, a popular refinancing option, averaged 3.23 percent with an average 0.8 point, down from 3.3 percent last week and 4.09 percent a year ago. Rates on 15-year loans hit a low in records dating to 1991 of 3.13 percent during the week ending March 8.

For 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans, rates averaged 2.9 percent, with an average 0.8 point, down from 2.96 percent last week and 3.7 percent a year ago. The five-year ARM hit a low in records dating to 2005 of 2.8 percent the week of Feb. 23.

Rates on 1-year Treasury-indexed ARMs averaged 2.78 percent with an average 0.6 point, down from 2.84 percent last week and 3.26 percent a year ago. Rates on one-year ARMs hit an all-time low in records dating to 1984 of 2.72 percent during the week ending March 1.

Looking back a week, a separate survey by the Mortgage Bankers Associationshowed demand for purchase loans during the week ending March 23 was up a seasonally adjusted 3.3 percent from the week before. The MBA survey showed demand for purchase loans was up 1 percent from a year ago.

Requests to refinance existing mortgages were down for the sixth week in a row, to a level 24.2 percent lower than a peak seen in February, 2012. Requests to refinance still accounted for 71.9 percent of all mortgage applications, but that’s the lowest share since July 2011.

Freddie Mac’s chief economist, Frank Nothaft, attributed the decline in mortgage rates to weaker housing economic indicators.

The Standard & Poor’s/Case Shiller 20-City Composite home price index slid in January to its lowest reading in about a decade, Nothaft said in a statement. “In addition, new-home sales declined 0.5 percent in February, below the market consensus of an increase, and pending existing home sales also declined for the month.”

Mortgage rates are determined largely by investor demand for mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

During the downturn, the government helped keep mortgage rates low by buying more than $1 trillion in MBS. The government’s “quantitative easing” programs — which also included purchases of Treasury bonds — added to the demand for MBS and similar investments, pushing up their price, and reducing their yields.

Although the Federal Reserve discontinued its mortgage-backed securities purchases in March 2010, mortgage rates continued to fall as MBS remained popular with investors seeking a safe haven from turmoil in financial markets.

As the economic recovery picks up steam, mortgage rates and interest rates could rise if government-backed MBS and Treasury bonds fall out of favor with investors.

Real estate economists and analysts surveyed by the Urban Land Instituteexpect 10-year Treasurys to rise as the recovery picks up steam, from an average of 2.4 percent this year to 3.1 percent in 2013 and 3.8 percent in 2014.

Historically, mortgage rates have tracked 10-year Treasury yields fairly closely, so that forecast implies mortgage rates could rise 140 basis points, or 1.4 percentage points, in the next two years.

According to Euro Pacific Capital Inc. CEO Peter Schiff, the flight from bonds could be exacerbated by the government’s massive holdings, which Schiff thinks have a distorting effect on the market.

Schiff — whose views are more pessimistic than those of many investors and economists — predicts a bubble in bond markets will lead to another economic crash in the next two to three years.

The root of the problem is similar to the problems faced by debtor nations in Europe, Schiff told Forbes this week: “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back.”

Mortgage rates began their recent surge on March 13 after the Federal Reserve’s open market committee announced that its members do not anticipate an expansion of existing quantitative easing programs.

The committee said the Fed will continue reinvesting principal payments from its MBS holdings into like investments, and rolling over maturing Treasury securities at auction. Signs of an economic recovery and a surge in the stock market may also have hurt demand for Treasurys and MBS.

Yields on Treasurys and MBS came back down this week after Federal Reserve Chairman Ben Bernanke said unemployment remains a worry and that the Fed remains prepared to boost the economy with “continued accommodative policies.”

Much of the recent improvement in job markets is due to a slowdown in layoffs rather than increased hiring, Bernanke said Monday at an economics conference.

The private sector employs 5 million fewer workers than it did at its peak, and the workforce has grown in the meantime, he noted. The unemployment rate in February was 3 percentage point above its average over the 20 years before the recession.

Further improvements in the unemployment rate “will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” Bernanke said.

The National Association of Realtors’ chief economist, Lawrence Yun, stated that fears of rising mortgage rates could spur homebuyer demand. But if rates increase significantly, that would reduce buyers’ purchasing power, Yun said.

Yun predicts rates on 30-year fixed-rate mortgages will soon be in the 4.3 to 4.6 percent range.

In their most recent forecast, economists at Fannie Mae said they expect 30-year fixed-rate loans to average 4.1 percent during the second half of 2012, and 4.3 percent in 2013.