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Forecast Calls for Rise in Record Rates

Rates

While fixed-rate mortgages fell to new lows this week, the latest data suggests a small increase by next week and an even bigger increase over the next couple months. Standard and hybrid adjustable-rate mortgages were identically priced this week — making the hybrid product a more attractive option.

The latest record-low 30-year mortgage was 3.53 percent, according to Freddie Mac’s Primary Mortgage Market Survey for the week ended July 19. The 30-year fixed-rate mortgage averaged 3.56 percent last week and 4.52 percent during the same week last year.

“With little signs of inflation and the Federal Reserve’s ‘Operation Twist’ keeping U.S. Treasury bond yields in check, fixed mortgage rates are remaining low,” Freddie Mac Chief Economist Frank Nothaft said in the report.

A Mortgage Daily analysis of Treasury market activity indicates that mortgage rates could inch up 2 BPS by next week’s report. The 10-year Treasury note yield averaged 1.52 percent during the period that Freddie surveyed lenders for this week’s report, while the 10-year Treasury yield closed at 1.54 percent on Thursday, according to data from the Department of the Treasury.

Rates aren’t moving more than 2 BPS over the next week based on half of the panelists surveyed by Bankrate.com for the week July 19 to July 25. The other half was evenly split about whether rates would rise or fall at least 3 BPS.

Freddie forecasts that the 30 year will average 3.7 percent in the third quarter then increase further to 3.8 percent in the fourth quarter.

Jumbo mortgages were priced 81 BPS higher than conforming loans in the U.S. Mortgage Market Index report from Mortech Inc. and Mortgage Daily for the week ended July 13, leaping from the 70-basis-point spread a week earlier. The jumbo premium was just 47 BPS a year earlier.

Freddie reported that the 15-year fixed rate mortgage was also 3 BPS lower than last week, averaging a record-low 2.83 percent in this week’s survey. Fifteen-year loans were discounted 70 BPS compared to their 30-year counterparts, the same as last week.

A 5-basis-point decline from last week left the five-year, Treasury-indexed, hybrid ARM averaging 2.69 percent in Freddie’s survey.

No change was reported from last week by Freddie for the one-year Treasury-indexed ARM, which averaged 2.69 percent. The one year, however, was down from 2.97 percent a year ago. Given the choice between identically priced one-year ARMs and hybrid ARMs — prospective borrowers would be wiser to choose the hybrid and its five-year fixed-rate period.

The outlook is for the one-year ARM to average 2.7 percent this quarter and 2.8 percent in the fourth quarter, according to Freddie.

The good news for existing one-year ARM borrowers is that the underlying index, the yield on the one-year Treasury note, fell to 0.17 percent Thursday from 0.20 percent last Thursday, according to Treasury Department data.

A one-basis-point decline from last week was reported by Bankrate.com for the six-month London Interbank Offered Rate. LIBOR, an index for many subprime ARMs, was 0.73 percent as of Wednesday.

ARM share was a meager 2.9 percent in the Mortgage Market Index report, slipping for the third consecutive week.

Freddie predicts that ARM share of production will be 15 percent for the remainder of this year and all of next year.

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