September 19th, 2011

Mortgage rates falling, the Fed comes calling



Housing Market Trending DownUnfortunately, “mortgage rates fall to new record lows,” loses its potentially profound significance when it’s virtually the same headline week in and week out.

As’s resident expert Keith Gumbinger writes in the latest Market Trends newsletter, besides mortgage rates, what else is left to cheer about?

“Delinquencies, foreclosures, underwater homeowners, borrowers with sub-par credentials and more have been a continuing story for years now, and there is little abatement in those areas. Even record low mortgage rates have limits in how much assistance they can offer…”

Mortgage rates still falling

For those who can qualify, mortgage rates managed to offer a little more assistance last week as they slipped even lower, breaking into new record territory:’s broad-market mortgage tracker—our weekly Fixed-Rate Mortgage Indicator (FRMI)—found that the overall average rate for 30-year fixed-rate mortgages (conforming, non-conforming, jumbo) decreased by another four basis points last week (0.04 percent), moving to a new record-low average of 4.38 percent.

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FHA-backed 30-year fixed-rate mortgages, especially important to first-time homebuyers and low-equity refinancers, shed five hundredths of a percentage point, closing the week at just 4.01 percent.

Hybrid 5/1 ARMs might interest a few borrowers, with five-year fixed-rate periods slipping by another five basis points this week to average an ultra-low 3.08 percent. 

So while record-low mortgage rates continue, even though their current influence may be minor, we may end up seeing a new push to help long-term rates move even lower in the weeks and months ahead. Whether or not it will do much good remains an open question.

The Fed comes calling

The Fed will conclude a two-day meeting on Wednesday in which the economy will be front and center of discussions. New plans to stimulate the economy will likely be discussed.

Here’s Gumbinger’s breakdown of the possible new initiatives to emerge from the Fed this week:

Gumbinger thinks that “while the Fed might consider a new round of bond or mortgage-backed security buying, the beneficial effects of those programs’ ideas are believed to largely spent.”

Instead, two ideas which seem likely to get the most play are changing the mix of the duration of holdings on the Fed’s balance sheet (called “Operation Twist”), which would see the Fed trading in maturing short-term bills and notes in favor of purchasing more longer-term bonds, and/or lowering the interest the Fed is paying banks to park excess funds with the Fed itself.

The concepts are pretty simple, but what do they mean?

Changing the investment mix means that short-term rates (already near zero, and so hard to force lower) might increase slightly as the Fed purchases fewer of them, while long term rates might decline as the Fed willingly buys these bonds, which will tend to push their prices up and their yields down. Rather than compete against the Fed, this change might push investors to seek out higher yielding “risk” assets, taking money away from the safe haven of Treasuries and putting it to work it the private economy, which in turn might provide some boost to economic activity.

At the same time, lowering the yield banks are earning by keeping money parked and out of circulation might see banks instead pushing to lend or invest in elsewhere in the economy, which might make more money available for lending, and at possibly easier terms for certain kinds of borrowers, most probably business borrowers.

What’s the benefit?

When discussing the potential benefits of a plan that’s yet to get off the ground is certainly a matter of speculation. But there is, according to Gumbinger, potential for it to boost GDP growth by a couple of tenths of a percent or so. Given the weak state of the economy—presently hovering around a 1 percent GDP rate—any boost would be welcome, but any new Fed program is certainly not a panacea for what ails the economy.

Perhaps there are other ideas which may come to light when the Fed meeting ends on Wednesday, and more radical ideas may certainly be considered by the Committee, but these seem most likely to come at the moment.

This week’s mortgage rate forecast

The economic picture remains dark. This alone suggests that lower to stable mortgage rates will persist this week. We might see occasional flares if bright spots in the economy reveal themselves.

The focus this week is on the Fed and the few housing-related indicators which are due out. An improved stock market firmed up interest rates at the end of last week, suggesting that we’ll see mortgage rates firm up a little this week, probably just enough to lift us off record lows. Of course, a wildcard in the forecast is the Fed; if something unexpected comes in the statement which will come on Wednesday, some additional volatility in either direction might occur.

Keith Gumbinger contributed to this post.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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