Mortgage rates keep sliding

15-year loans have been below 3 percent for 7 weeks

Mortgage rates broke records again this week as fears that the European debt crisis will slow the global economy had investors moving money out of stocks and into safer investments like Treasuries and bonds that fund most mortgage loans.

Rates on 30-year fixed-rate mortgage averaged 3.56 percent with an average 0.7 point for the week ending July 12, down from 3.62 percent last week and 4.51 percent a year ago, Freddie Mac said in releasing the results of its weekly Primary Mortgage Market Survey. That’s a new all-time low in Freddie Mac records dating to 1971, and rates on 30-year loans have now been below 4 percent for 16 consecutive weeks.

For 15-year fixed-rate mortgages, rates averaged 2.86 percent with an average 0.7 point, down from 2.89 percent last week and 3.65 percent a year ago. That’s also an all-time low in records dating to 1991, and rates on 15-year loans have been below 3 percent for seven weeks.

Rates on five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) loans averaged 2.74 percent with an average 0.6 point, down from 2.79 percent last week and 3.29 percent a year ago. That’s an all-time low in records dating to 2005.

For one-year Treasury-indexed ARM loans, rates averaged 2.69 percent with an average 0.4 point, up from 2.68 percent last week but down from 2.95 percent a year ago. Last week’s rate for one-year ARMs was an all-time low in records dating to 1984.

A separate survey by the Mortgage Bankers Association showed that while demand for purchase loans was up a seasonally adjusted 3 percent during the week ending July 6 compared to the week before, purchase loan applications were down 3 percent from a year ago.

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At their June 19-20 meeting, members of the Federal Reserve’s Open Market Committee were told by Fed staffers that while the "housing sector generally improved in recent months," it was "still restrained by tight credit standards for mortgage loans and the substantial inventory of foreclosed and distressed properties," according to minutes of the meeting.

Most committee members attending the meeting "anticipated that housing markets were likely to recover only slowly over time, in part because tight credit standards in mortgage lending meant that low mortgage rates were now generating less of a pickup in home sales and construction than had been the case during the recoveries from earlier recessions," the minutes said.

A few committee members were more optimistic about the potential "for a sizable upturn in housing activity."

In an attempt to encourage lending, the European Central Bank this week reduced short-term, overnight interest rates to zero — a level reached by the Fed in 2008.

In response, banks pulled nearly half a trillion euros in deposits out of the European Central Bank, but there are doubts that they’ll make more loans to businesses and consumers, as intended, Reuters reports. Banks had parked much of the 1 trillion in Euros that the European Central Bank injected into the economy in December and February.

If banks don’t boost lending, European Central Bank policymakers said they still have other options. In the U.S., after gradually reducing the federal funds overnight rate to zero in 2007 and 2008, the Fed embarked on two major rounds of "quantitative easing" to stimulate the economy. The government bought up Treasuries and bonds that fund mortgages to reduce the cost of borrowing.

With U.S. economic growth slowing, there’s increasing talk that the Fed may embark on a third round of quantitative easing, or "QE3."

Minutes of the Federal Open Market Committee’s last meeting show that members were nearly unanimous in their continued support for "Operation Twist," in which the Fed keeping a lid on long-term rates by using the proceeds from $267 billion in maturing short-term Treasury bills to buy up $44 billion a month in long-term T-bills.

The committee agreed that the Fed should also continue reinvesting principal payments from its holdings of mortgage-backed securities (MBS) guaranteed by Fannie Mae and Freddie Mac into more of the same investments.

While the committee agreed that it was prepared to take "further action as appropriate" — such as a QE3 program — to promote a stronger economic recovery and job growth, only a few members were ready to take such action in June, the minutes reveal.

At some point, some members of the committee warned, the government’s purchases of Treasuries could have the opposite of the intended effect.

If investors believe the government is buying up too much debt, some committee members worried there could be a "deterioration in the functioning of the Treasury securities market that could undermine the intended effects of the policy." In other words, interest rates might go up, instead of down — a problem already being experienced by a number of countries in Europe.

Before embarking on QE3, "a few members observed that it would be helpful to have a better understanding of how large the Federal Reserve’s asset purchases would have to be to cause a meaningful deterioration in securities market functioning, and of the potential costs of such deterioration for the economy as a whole," the meeting minutes said.

The Federal Open Market Committee is scheduled to hold four more meetings this year — including three meetings before the Nov. 6 election: July 31, Sept. 12, and Oct. 23.

Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, told Bloomberg that the Fed could take action as early as its Sept. 12 meeting.


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