Sales, Refinancings Surge as Mortgage Rates Slip Below 7%

Mortgage rates fell below 7% this week for the first time since March, tracking falling Treasury bond yields and sparking a new, if less-frenzied, round of refinancings and home buying, analysts say.

Average mortgage rates in Southern California have fallen to 6.79%, from 7.5% in July and 7.78% a year ago, said Earl Peattie, head of Mortgage News Corp. The last time consumers enjoyed rates this low for 30-year fixed loans was in March, when they hit 6.7%.

Applications at Countrywide Home Loans jumped 27% last weekend from the weekend before, said Stephen Brandt, a senior vice president at the Calabasas company. About 44% of those were refinancings.

“We’re seeing some [borrowers] who came to us in the beginning of the year coming back a second time to refinance,” Brandt said. “They thought they’d hit the low point earlier this year.”

Nationally, total loan applications for last weekend were up 53.1% from a year ago, while refinancings surged 325% from last year, said the Mortgage Bankers Assn. of America.

In part, the new wave of refinancing has been fueled by borrowers’ expectations that the Federal Reserve will lower its key short-term rate by a quarter-point next week, analysts say. The Fed already has cut rates six times this year for a total of 2.75 percentage points.

But mortgage interest rates don’t move in tandem with the Fed’s key short-term rate, which is the interest banks charge each other on overnight loans.

Rather, mortgage rates tend to follow long-term bond yields--specifically, the 10-year Treasury note yield. That yield dropped last year as the economy slowed, and last week dipped below the 5% benchmark, to 4.98%, for the first time since mid-April.

Long-term bond yields are influenced by moves in the Fed’s short-term rate, but also reflect market forces. For example, as stocks have tumbled this summer some investors have taken money from stocks and invested in bonds instead, helping to drive yields lower. On Wednesday, however, bond yields ticked up modestly.

“Mortgage-backed bonds have been one of the better-performing sectors this year,” said Lyle Gramley, a consulting economist at the Mortgage Bankers Assn. He added that some key indicators point to an upturn in the economy in the next few months.

If that’s true, investors might be encouraged to buy higher-yielding mortgage-backed bonds rather than Treasuries, and that might work to keep mortgage rates from rising in lock-step with any rebound in Treasury yields spurred by a stronger economy, said John Lonski, chief economist with Moody’s Investors Service.

In any case, many economists believe the bond market already has figured in additional Fed rate cuts in the months ahead, so a deeper decline in mortgage rates probably won’t materialize this year.

But that won’t stop borrowers from refinancing now, analysts say. Many consumers want to refinance not just to reduce monthly payments, but to remodel, buy a car, pay college expenses or pay down credit card debts.

“We have much less gain in the stock market to fall back on, but homes are still increasing in value,” said Casey Colton, portfolio manager at American Century Investment Services. “So we’re using the mortgage market to fund their consumption.”

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Lower Rates

Rates on 30-year mortgages have fallen to four-month lows, tracking the slide in yields on 10-year Treasury notes.

30-year mortgage rate (from Freddie Mac), weekly closes:

Friday: 7.00%

10-year Treasury note, weekly closes:

Friday: 4.98%

Source: Bloomberg News