As 2014 arrived, experts were confident that the 30-year mortgage rate would rise to at least 5% this year as the Federal Reserve cut back a bond-buying program, which had depressed the rates to unheard-of lows in 2013.
So much for the experts. The Fed has reduced purchases to $20 billion a month in mortgage bonds, down from $40 billion when the program began in September 2012. Yet lenders this week were offering 30-year fixed home loans at an average of 4.2%, the lowest rate in six months, according to home finance giant Freddie Mac.
According to one leading Southland mortgage broker, Jeff Lazerson, certain borrowers with excellent credit are once again able to get 30-year loans with fixed rates a smidge under 4%.
“We’ve got our mojo back,” said Lazerson, president of the Mortgage Grader brokerage in Laguna Niguel.
Wiping some egg off their faces, economists said unforeseen factors have led worried investors to embrace the safety of high-quality bonds this year. And when demand for bonds rises, their effective interest rates fall. The yield on the 10-year Treasury note, at 3% when the year began, has slipped to about 2.6%, and home lending rates have followed, as they generally do.
Rising rates had largely choked off a huge boom in refinancing, which enabled millions of homeowners to lower their borrowing costs as the 30-year rate declined from more than 6% in early 2008 to below 4%. It bottomed out at less than 3.5% in late 2012 and again in May 2013.
The rates these days have fallen low enough to trigger a mini-revival in refinancings, helping to offset sluggish demand for loans to buy homes, Lazerson said.
He said some highly qualified borrowers are now able to get loans at rates as low as 3.875% by paying one discount point — 1% of the loan amount — as an upfront fee.
Others have taken advantage of the lower rates to shed mortgage insurance payments they had been making because they had down payments of less than 20% when they bought their homes. (Lenders generally require insurance when the loan amount is more than 80% of the home’s value.)
That was the case for Marsh Hauge, who said he has been paying $220 a month for insurance on a Federal Housing Administration-backed mortgage since he bought a house in Orange two years ago.
Hauge said a recent appraisal showed his home had risen enough in value so his loan, for less than $400,000, now amounted to about 75% of his home value.
When the mortgage servicer still resisted dropping the insurance payments, Hauge decided to simply refinance the entire loan into a mortgage with no insurance. He said his interest rate will rise a fraction, from 4.13% to 4.25%, but it’s worth it to lose the $220 a month drain on his finances.
The rates are far below what economists such as Moody’s Analytics’ Mark Zandi had been expecting. Back in September, Zandi had forecast that the rates would have reached 5% by now. He currently projects that it will take until the spring or summer of 2015 to reach 5%.
Freddie Mac chief economist Frank Nothaft’s forecast is similar: a rise to 4.6% or 4.7% by year-end, reaching 5% in mid-2015 instead of the end of 2014 as Nothaft had expected. A sluggish first-quarter economy, due in part to a harsh winter, slowed down the housing market and reined in borrowing costs, Nothaft said.
He, Zandi and Joel Kan, director of forecasting at the Mortgage Bankers Assn., all said international concerns, especially worries over Russia’s aggressive stance in the Ukraine, had also helped drive down rates as investors sought a secure place for their funds.
“A lot of money flowed out of emerging markets,” Zandi said. “It went back into the developed countries — the U.S. and Europe. They just didn’t want to be in Turkish bonds or Brazil bonds.”
Another factor driving rates down has been competition.
As the refi business shriveled up, lenders for the first time in years had loans for home purchases as their principal business. But the demand has been lower than expected as the housing market has cooled.
In trying to boost production, bankers have cut their profit margins on lending, which had swelled in 2012 and 2013 amid the refinance boom, Zandi said.