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Rates Jump

Rates Jump

Average 30-year 6.37%

May 24, 2007


photo of Coco Salazar
Comments from the Federal Reserve helped send mortgage rates soaring during the latest week. And as interest rates move higher, more adjustable-rate borrowers are refinancing into fixed rate loans.

The 30-year fixed-rate mortgage average soared 16 basis points from last week to 6.37%, Freddie Mac said its latest Primary Mortgage Market Survey showed. Nonetheless, the average is still lower than 6.62% at this time last year.

Contributing to higher mortgage rates were falling expectations for a cut in the federal funds target rate this year because of stronger-than-expected consumer confidence and recent comments from Federal Reserve members that raised some inflation concerns in the market, Freddie Chief Economist Frank Nothaft said.

“We expect a gradual rise in mortgage rates over the remainder of the year,” Nothaft added in an announcement.

The Mortgage Bankers Association seems to be in line with that prediction, as its latest forecast has the 30-year averaging 6.4% this quarter and rising by 10 BPS in each of the following quarters to end the year at 6.6%. Fannie Mae’s updated outlook, on the other hand, has the 30-year average 6.60% this quarter, slipping by 4 BPS next quarter and then all the way down to 6.25% in the last three months of the year.

Over the next month and a half, nearly two-thirds of the 100 mortgage “experts” surveyed this week by believe rates will rise, a quarter forecast they’ll remain relatively unchanged and only 14 foresee a downturn.

The 15-year averaged 6.06%, up 14 BPS from a week ago, Freddie reported.

The 10-year Treasury note, a gauge for long-term mortgage rates, yielded 4.84% this afternoon, jumping from 4.75% last week.

Yields for adjustable-rate mortgages also increased from last week, with the 5-year Treasury-indexed hybrid ARM average jumping 10 BPS to 6.02% and the 1-year Treasury-indexed ARM soaring 16 BPS to 5.64%. The 1-year Treasury bill itself rose 11 BPS over one week to 4.96% Tuesday, Federal Reserve data showed.

Despite the latest rate increases, the ARM share inched up to 18%, according to MBA’s latest Weekly Mortgage Market Survey, which runs one week behind Freddie’s.

Over the first quarter, however, ARMs lost popularity to fixed-rate loans — 89 percent of borrowers who originally had a 1-year ARM and 84 percent who initially had a hybrid ARM chose to refinance into a fixed-rate mortgage, Freddie reported its Refinance Product Transition Report showed.

“In one year, the fully indexed rate that these ARM loans will adjust to exceeds the 30-year fixed mortgage rate today by a wide margin, so borrowers are choosing more and more to take the security of a fixed-rate loan when they refinance,” said Amy Crews Cutts, Freddie deputy chief economist, in the announcement.

Of the borrowers originally holding a 30-year fixed rate, 82 percent refinanced back into the same product, slightly higher than in the prior quarter and a year earlier, according to Freddie.

“Generally speaking, fixed-rate borrowers like to stick with fixed-rate products,” Cutts explained. “This was true even in 2004, when there was a wide gap between 30-year fixed mortgage rates and 1-year ARM rates, making ARMs relatively very attractive, and just 8 percent of 30-year fixed-rate borrowers jumped over to an ARM product when they refinanced.”

Freddie’s report was based on a sample of properties on which Freddie has funded at least two successive loans.

Mortgage application volume edged up 2 percent from the previous week, reflecting a 1 percent increase in purchase money demand and a 2 percent upturn in refinance requests and, MBA reported. The refinance share of applications was unchanged from the prior week at 42%.


Coco Salazar is an associate editor and staff writer for

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