Bond market signals that mortgage rates may drop

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The bond market has been sending slightly better news to mortgage borrowers the last few days as investors in securities carved out of home loans have been accepting lower returns.

Yields on Freddie Mac and Fannie Mae mortgage securities fell today for the third straight day, meaning the buyers are OK with lower rates on the loans backing the securities. The typical rate on a fixed-rate 30-year loan rose to 5.59% last week, up from a record low of 4.78% in late April, according to Freddie Mac.

Yields on Fannie Mae 30-year fixed-rate mortgage bonds dropped to 4.71%, down from 5.07% last Wednesday and the lowest since June 3. Freddie Mac bonds were yielding 4.78%, down from 5.15% Wednesday. On May 20, bond buyers were OK with returns of less than 4% on the securities.

Rising rates have throttled the home refinancing spree that took hold last fall and continued through the winter. While rates under 6% are still great by historic standards, the recent increase also made it tougher to qualify for home purchases, and higher rates generally can put the brakes on the economy.

The higher rates also contributed to an unexpected decline in confidence among U.S. home builders in June, according to a National Assn. of Home Builders/Wells Fargo housing survey out today.

Analysts had expected confidence to increase, but the builder group said anxiety over jobs and the economy, along with higher rates, had clouded the prospects for a housing recovery.

-- E. Scott Reckard