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Freddie Economist Sees "Further Downward Drifts" for Mortgage Rates

Mortgage market activity week of Fed rate cut

November 8, 2002


What did it mean for the mortgage industry when the Federal Open Market Committee announced Wednesday it was cutting interest rates?

Not much, according to some analysts. However, the one-year adjustable-rate mortgage (ARM) hasn't been lower since 1994, in addition to mortgage applications increasing and fixed-rate mortgages holding steady for the week.

On Wednesday, The Federal Open Market Committee announced it would lower its target for the federal funds rate by 50 basis points (BPS) to 1.25% and lowered the discount rate 50 BPS to 3/4 percent.

Borrowers shouldn't assume that mortgage rates will fall in reaction to the rate cut announced by the Federal Reserve's rate-setting body, said Jack Harris, an economist for the Texas A&M Real Estate Center, to Bankrate.com.

But the announcement isn't totally useless to the industry, according to The Wall Street Journal. While borrowers shopping for a fixed-rate mortgage aren't likely to see any benefits from the rate cut, it could mean lower rates on ARMs, which have been decreasing recently.

The 1-year ARM averaged 4.15% this week -- and hasn't been lower since the week ending Feb. 4, 1994, when it was 4.12%. Last week's was 4.25%, and this time last year averaged more than a percentage point higher than this week, according to Freddie Mac's weekly mortgage survey released Thursday.

"The gap between 30-year fixed-rate mortgages and ARMs should increase," said Keith Gumbinger, a mortgage analyst with financial publishers HSH, to The Wall Street Journal.

The spread between the 1-year ARM and the 30-year fixed rate was 1.96%, up from 1.88% the prior week, according to Freddie's survey. The spread had been as wide as 2.14% in April.

For the week ending Nov. 1, mortgage applications increased 13.1% to a seasonally adjusted 1030.5, according to Mortgage Bankers Association of America's (MBA) weekly market composite index. The previous week's index rang in at 911.0, but applications were slightly higher at 1037.9 during the same week last year.

Although some analysts aren't expecting the Fed announcement to affect the mortgage industry much, MBA economist Phil Colling said he thinks there's still some lift left in the refinance boom.

"Last week's increase in the refinance index reversed a three-week downward trend from its record high, and indicates that the refinance boom is still going strong," he said.

The 30-year fixed rate mortgage averaged 6.11% for the week ending Nov. 8, just barely decreasing from last week, according to Freddie's survey. Last year at this time, the 30-year averaged 6.45%. On a national note, the 30-year was lowest in the West at 6.03%, and highest in the North Central at 6.23%.

The average for the 15-year fixed rate this week is 5.48%, down from last week's average of 5.51%, Freddie reported. A year ago, the 15-year averaged almost a half percentage point higher.

Expecting more from the Fed's rate cut than other industry analysts, Frank Nothaft has a more optimistic outlook.

"We expect to see further downward drifts over the coming week or so as the market moves on the actual larger rate cut itself," said the chief economist at Freddie.

Near midday, the 10-year Treasury note was up11/32, lowering its yield to 3.85%, according to Lioninc.com.

Christy Robinson is the editor of MortgageDaily.com. She received a bachelor's degree in news-editorial journalism from The University of Texas at Arlington. Her work has previously been published in The Dallas Morning News.

email Christy at: [email protected]

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