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Refinance Tsunami Alert

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A refinance tsunami warning has been issued for the United States. Record rates have been reported, and Thursday’s Treasury market activity points to even lower rates in next week’s reports.

Several economic reports collided to spook investors and drag down the Dow Jones Industrial Average more than 400 points. The impact to the 10-year Treasury was stark, with the price on the 10-year Treasury up more than a point and a yield below 2 percent in sight.

The news comes on top of a report from secondary mortgage lender Freddie Mac, which said in its Primary Mortgage Market Survey for the week ended today that the average 30-year fixed-rate mortgage was 4.15 percent — the lowest on record.

The 30 year averaged 4.32 percent a week earlier and 4.42 percent a year earlier.

Freddie’s chief economist, Frank Nothaft, attributed the decline in rates to the Federal Reserve’s recent policy statements and continuing concerns about the European debt market.

The Department of the Treasury reported that the 10-year Treasury yield closed last Thursday at 2.34 percent. Today, the 10-year yield is trading around 2.05 percent, according to WSJ.com. The nearly 30-basis-point decline suggests mortgage rates may have a little further to fall in next week’s report.

The improving interest rates have driven the share of refinance activity up to 69 percent in the U.S. Mortgage Market Index report from Mortech Inc. and Mortgage Daily for the week ended Aug. 12 from less than half in early July. The report reflects pricing inquiries on new business.

The latest rate movement is likely to push refinance share even higher.

The view from nearly half of Bankrate.com panelists was that no changes are ahead during the next week or so. A third predicted an increase of at least 3 BPS and only a fifth expected an improvement.

On a longer-term basis, Freddie expects the average 30-year to rise from 4.5 percent this quarter to 4.6 percent in the fourth quarter and continue increasing through 2013, when it reaches 6.0 percent.

The spread between jumbo and conforming mortgages widened to 53 BPS as of last Friday from 47 BPS a week earlier, based on the Mortgage Market Index.

Freddie reported the average 15-year fixed-rate mortgage at a record-low 3.36 percent. The 15 year was 3.50 percent last Thursday. The spread between the 15 year and the 30 year was cut to 0.79 percent from 0.82 percent in the prior survey.

At 3.08 percent, the average five-year, Treasury-indexed, hybrid, adjustable-rate mortgage was 5 BPS better than last week and also at an all-time low.

The one-year Treasury-indexed ARM averaged a record 2.86 percent in Freddie’s report, 3 BPS lower than last week. The one year was 3.53 percent during this week last year. Freddie projects that the one-year will be at 3.1 percent for the rest of the year then slowly rise to 3.8 percent by 2013.

The index used to determine rate adjustments on the one-year ARM, the yield on the one-year Treasury note, closed at 0.12 percent yesterday, climbing from 0.09 percent the prior Wednesday. The six-month London Interbank Offered Rate continued climbing. LIBOR was 0.46 percent as of Wednesday, up from 0.45 percent seven days prior.

ARM share of pricing inquiries sank to 6.33 percent in the latest Mortgage Market Index report from the previous week’s 8.66 percent.

Freddie predicts that ARM share of closed loans will deflate to 10 percent in the fourth quarter from the third quarter’s 11 percent then spend most of next year at 12 percent.

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