Fixed mortgage rates fell early this week following last week's dramatic surge, with lenders offering 30-year home loans to solid borrowers at an average of 4.29%, according to Freddie Mac.
The average rate had spiked to 4.46% a week earlier on fears that the Federal Reserve would soon cut back on a major bond-buying program designed to keep interest rates low.
The latest rate is still nearly a percentage point above last fall's record low of 3.31% -- high enough to cut sharply into home refinancings.
The 15-year fixed loan average fell from 3.5% to 3.39%, Freddie said in its report, issued Wednesday. The record low for the 15-year mortgage, which has been popular with refinancers, was recorded at 2.56% in Freddie Mac's May 2 survey.
The current rates, a bargain by historical standards, reflect speculation over when the Fed will reduce its $85 billion a month in purchases of Treasury and mortgage-backed securities -- a stimulus program designed to keep long-term rates low.
Mortgage applications fell 12% last week from the previous week, according to the Mortgage Bankers Assn., with refinances off sharply and purchase applications down slightly. The refinance share of applications fell to 64%, the banker group said in a report -- its lowest level in more than two years.
“At these rates, many fewer homeowners have an incentive to refinance,” said Michael Fratantoni, vice president of research and economics at the trade group. For borrowers who want to purchase homes, “affordability remains strong,” he said.
As fear of rising rates swept through the credit markets last week, mortgage bond investors rushed to sell, creating a “negative feedback loop” that drove rates still higher, said Laurie Goodman, a mortgage analyst with Amherst Securities Group.
This caused “very large dislocations” in trading of government-sponsored mortgage securities backed by Freddie Mac and its cousin, Fannie Mae, Goodman wrote in a report to investors this week.
She said certain mortgage bonds now looked cheap, with the selloff "far more than is justified by the fundamentals," given that the Fed has not yet begun to taper off on its bond purchases.
The Freddie Mac survey was put out a day early because Thursday, the usual day of release, is Independence Day. The survey asks lenders about the terms they are offering to solid borrowers who pay less than 1% of the loan amount in upfront lender fees and points.