Gregory J. Heym
Executive Vice President, Chief Economist
Fed actions spur drop in 30-year fixed-rate mortgages, but ARM rates still climbing
Borrowers looking for fixed-rate mortgages can now find the lowest rates in more than a month. But experts warn the rate decline may not last.
Rates on fixed-rate mortgages dropped sharply in the past week, after the Federal Reserve took several historic moves to shore up the financial markets. The rate on a 30-year loan dropped to an average of 5.87%, down from 6.13% a week ago, according to new Freddie Mac figures released Thursday. A 15-year mortgage now can be had for 5.27%, down from 5.60%
Mortgage rates had soared since mid-February as investors turned away from securities backed by traditional loans backed by Fannie Mae and Freddie Mac. This market had remained fairly stable throughout the mortgage meltdown, but ran into trouble starting when the two companies reported a combined $6 billion in losses last month.
In the past week, the Federal Reserve worked to calm the markets by taking a series of steps, including allowing investment banks to borrow funds and put up mortgage-backed securities as collateral. Also, it backed JPMorgan Chase's fire-sale purchase of Bear Stearns and cut the interest rate by three-quarters of a point.
Rates on adjustable-rate mortgages, however, continue to climb, averaging 6.44%, up from 6.21% last week, according to Bankrate.com. That's because these loans have higher default and delinquency rates so investors continue to demand a premium, said Greg McBride, senior financial analyst at Bankrate.com.
But it's too early to tell what will happen to rates in coming weeks, experts said. Another round of bad news could easily spook mortgage-backed security investors again.
"Every time we think we see a trend, it seems to reverse itself," said Gregory Heym, chief economist with Terra Holdings, parent company of two of Manhattan's largest real estate brokerage companies.
Thursday, March 20, 2008