June 11, 2005
Bankrate: Mortgage Rates Drop for 4th Straight Week

Mortgage rates dropped again significantly for the fourth consecutive week, with the 30-year fixed rate mortgage dropping  from 5.83 percent to 5.75 percent, according to www.L&GMortgagebanc.com . The 30-year fixed rate mortgage is now at the lowest point since July. 03. The mortgages in this week's survey had an average total of 0.39 discount and origination points.

We charge no origination fees at all. And still have the lowest rate available.

The 15-year fixed mortgage popular for refinancing also decreased, from 5.25 percent to 4.85 percent, and the jumbo 30-year fixed rate mortgage decreased from 6.19 percent to 5.73 percent. The one-year adjustable rate mortgage dipped 1 basis point to 3.85 percent. A basis point is one-hundredth of 1 percentage point.

Since bottoming on June 11, mortgage rates have soared and then dropped down again from 5.88 percent to 5.69 percent. Increased optimism over improving economic fundamentals, a reduced chance that the Fed will buy long-term government bonds, and the increased likelihood of additional government debt issuance amid ballooning federal deficits are the primary catalysts for a recent drop in long-term government bond yields. Mortgage rates are closely related to yields on long- term government bonds.

"Long-awaited improvement in corporate earnings and economic fundamentals have bond investors unwinding positions and yields rising sharply," said Greg McBride, Bankrate's senior financial analyst. "However, we're not out of the economic woods just yet and a modest retreat in rates would certainly materialize if the data disappoints. But the June lows thought to be a thing of the past has surprised many investors."

Along with droppingmortgage rates, monthly mortgage payments have also decreased. The monthly payment for a $165,000 30-year fixed rate mortgage on June 11 at 5.88 percent was $914.20, but is $888.20 this week at 5.65percent. The decrease of $74 per month amounts to more than $26,600 over the term of the loan.

The Mortgage Market this Week
by Larry Baer

Mortgage interest rates havedropped almost a full percentage point since establishing all-time record lows during the first two weeks of July 2003. Will it ever end?

The answer to the question is a resounding yes – but.

The bad news is that there is a very strong probability that mortgage interest rates will be pushed higher early this year when Uncle Sam announces his second quarter borrowing needs. There are many that think the government will have an appetite for new capital that exceeds the first quarter’s record setting $58 billion. If we are to believe the White House estimate for a $555 billion fiscal year 2005 deficit, it is a virtual guarantee that Uncle Sam will be pulling a record amount of capital out of the financial market’s cookie jar.

As I mentioned in this column last week, Uncle Sam is the fiercest of all competitors in the capital markets simply because he has the ability to either print money or to tax to pay his obligations, while the rest of us must do so out of cash flow. Because of Uncle Sam’s unlimited ability to service debt, Treasury obligations (bills, notes and bonds) are generally considered as close to a riskless investment vehicle as you can get.

Investors use this “riskless rate of return” to set required yields on all other types of investment vehicles – including single-family mortgage interest rates. The greater the perceived risk of the alternative investment, the higher the rate of return must be above the yield of the underlying Treasury obligation to compete effectively with Uncle Sam.

If Uncle Sam needs cash, you can believe that he will pay whatever interest rate is necessary to get the cash he requires to finance the burgeoning government revenue shortfall.
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Since Uncle Sam has such a huge borrowing need, it’s almost a given that bond yields will rise sharply if the government’s borrowing need is greater than expected. Believe it or not, this is likely good news for the prospects of lower mortgage interest rates through the late days of the summer and into the early days of the fall.

My bet is that yields are approaching levels where they are so attractive – especially against a backdrop that suggests that the Fed has no intention of raising short-term interest rates for the foreseeable future – that bond investors will find it virtually impossible to resist the temptation to buy.

I think that buying activity in the bond market will also increase as stock investors begin liquidating positions as it becomes increasingly apparent that earnings improvements are coming from cost cutting efforts and not a significant increase in corporate revenues. It won’t take long for earnings expectations to be revised lower as the impact of higher cost of long-term bank financing is cranked into the equation. A stock only has value if the earnings expectation for the underlying company is higher in the coming months and quarters. If those expectations are not recognized, the market value of the stock will likely fall.

A word of caution. I expect mortgage interest rates to move higher before they move lower. However, I think mortgage rates are etching out a top and will likely begin to move lower in earnest no later than the second half of August. There is little chance that the coming rally in the mortgage market will likely drive rates to their lows of June, but there is a very good chance that mortgage interest rates will be lower in September than the levels they establish this week.

Larry Baer is a nationally recognized authority on hedging, pipeline risk management, and interest rate forecasting techniques. He is a current faculty member of the Mortgage Bankers of America's School of Mortgage Banking and North Lake College in Irving, Texas. He is also a former faculty member of the Federal Home Loan Mortgage Corporation's School of Mortgage Finance and a former member of the Federal National Mortgage Association's regional advisory panel and is the Chief Analyst of Market Alert.