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June 11th, 2012

Mortgage rates continue their record-breaking streak

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Below is an excerpt from the latest Market Trends newsletter, available Friday night in your inbox:

Mortgage Rate ConceptMortgage rates continued to set new record lows last week, as the Federal Reserve reported that economic activity expanded at a moderate pace across its 12 districts.

HSH.com’s broad-market mortgage tracker — our weekly Fixed-Rate Mortgage Indicator (FRMI) — found that the overall average rate for 30-year fixed-rate mortgages fell by four basis points (0.04 percent) for the week to 3.99 percent, a new record low.

The FRMI’s 15-year companion shed two basis points (0.02 percent), landing at 3.27 percent.

Important to homebuyers and low-equity-stake refinancers, already-low FHA-backed 30-year mortgages moved deeper into record lows, decreasing by another four basis points to 3.64 percent, while the overall average rate for 5/1 Hybrid ARMs finished at 2.90 percent, another record low for the survey period.

Will ‘Operation Twist’ be extended?

The Fed’s own survey of regional economic conditions pointed to moderate growth in the six weeks leading up to May 25. The so-called “Beige Book” had a slightly more optimistic tone than the previous edition, but only slightly so. With more dark clouds forming both domestically and abroad, “contacts were slightly more guarded in their optimism,” according to the report.

With the troubles here and overseas so evident, there are some new calls for central banks to do more to spur growth, including our own Fed.

The Fed’s present program of exchanging its short-term debt for long-term debt (Operation Twist) is slated to expire at month’s end, and it is not clear what, if anything, might replace it. As noted in our last Two-Month Forecast, our own expectation is that the Fed will extend the program to the end of the year. Rates at or near record lows have no doubt provided some economic support; however, if already record-low rates aren’t enough to spark serious demand it seems unlikely that even lower ones will.

Do we still need low rates?

Low rates are great, but their benefit is limited to those who want or need to borrow. That want or need is narrowed down to those who actually can borrow, which is controlled by underwriting standards. Those who are well-aligned with today’s more rigorous standards are certainly enjoying the benefits of financing or refinancing debt at fantastic rates. That said, there remains a sizable group of would-be borrowers who cannot successfully overcome the hurdles to get access to today’s great rates, and so their beneficial economic effect becomes muted.

More direct and beneficial stimulus comes from jobs, wage gains, tax rebates or credits, or a material change in the costs of regularly-purchased goods, like food or gasoline. In this regard, falling gasoline and oil prices should eventually provide some additional support for the economy.

Given all the issues at hand, there is little reason to expect mortgage interest rates to move very much. There’s also little reason to expect them to continually set new lows day after day, week after week.

That said, a little bit of optimism being expressed in stock markets last week should prove enough to keep them from falling to any great degree, too. This week, we get fresh looks at Producer and Consumer Prices, Retail Sales, Industrial Production and a couple of other reports. Absent new headlines of a collapsing European economy or two, we think that mortgage rates might just move upward a couple of basis points.

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About the HSH Blog

HSH.com'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 HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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