19 Mar 2009
March 19 (Bloomberg) -- U.S. mortgage rates may fall to the lowest since World War II after the Federal Reserve announced plans to buy up to $300 billion of Treasuries and increase purchases of mortgage-backed bonds.The rate on a 30-year fixed mortgage may fall to 4.5 percent, the lowest since the 1940s, said Mike Larson, real estate analyst at Weiss Research in Jupiter, Florida. In 1945, the average annual rate for a mortgage was 4.7 percent, Larson said, citing data in the book, "A History of Interest Rates," published by Rutgers University Press.
"It's a big bullet the Fed's firing here," Larson said. "The Fed is kind of going all in."
The Fed yesterday said it will buy up to an additional $750 billion of agency mortgage-backed securities to support home lending. That would increase its commitment to as much as $1.25 trillion. The central bank is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their prices and thus lowering their yields. That allows banks to reduce the rates on new mortgages and still ensure profitable sales of the securities.
The Fed announced a program in November to buy $500 billion of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. That helped to drive the rate down to 4.96 percent during the week ended Jan. 15, the lowest since Freddie Mac began keeping track in 1971.
‘Greater Support'
Yesterday's decision was intended "to provide greater support to mortgage lending and housing markets," the Federal Open Market Committee said in a statement in Washington.
Freddie Mac, the McLean, Virginia-based mortgage buyer, will release its weekly mortgage rate survey for the week ended March 19 today. Rates in the survey will probably not be affected by the Fed's announcement yesterday.
Mortgage applications in the U.S. increased last week as lower borrowing costs led to a surge in refinancing. The Mortgage Bankers Association's index of applications to purchase a home or refinance a loan rose 21 percent to 876.9 in the week ended March 13, the highest in two months, from 723.4 the prior week. The group's refinancing gauge jumped 30 percent and its purchase index gained 1.5 percent.
The mortgage bankers' purchase index increased to 257.1 last week from 253.3 a week earlier. The index reached an eight- year low of 235.9 in the first week of February. The refinancing gauge rose to 4497.6, the highest in two months, from 3470.7.
Wider Spreads
While the Fed's actions have helped bring down mortgage rates, those costs have remained elevated relative to benchmark Treasuries. Prior to yesterday's announcement, the difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points, Bloomberg data show. That's up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
Lower mortgage rates by themselves also may not be enough to spark demand for home purchases.
For consumers who've lost their jobs or are worried about losing their jobs, low mortgage rates won't be enough to prompt them to commit to buying a house, Larson said.
Slumping stock prices, record home-loan defaults, falling house prices and job losses are reducing demand for new and existing homes in the U.S. Consumers are also having difficulty obtaining mortgages as banks tighten lending standards.
The U.S. jobless rate rose to 8.1 percent in February as employers reduced payrolls by 651,000, according to the Labor Department.
Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, the Mortgage Bankers Association said March 5. Loans in foreclosure rose to 3.30 percent, also an all-time high.
