Freddie Mac reported further modest declines in fixed mortgage rates this week, while adjustable-rate mortgages recorded increases.
The 30-year fixed mortgage rates fell six basis points to 5.47%, while 15-years were down 13 basis points to 5.20%. Meanwhile, one-year and 5/1 hybrid ARM rates rose seven and five basis points, respectively, to 5.09% and 5.82%.
While mortgage rates are improving, they are not down nearly enough to help improve the economic outlook, according to Deutsche Bank Economist Joseph LaVorgna.
Assuming that the Federal Reserve cuts rates 50 basis points next week, the funds rate will have been reduced 375 basis points since last December.
Mortgage rates, on the other hand, have been very sticky. For example, in January, 30-year fixed rates averaged 5.76%. LaVorgna attributed this to the capital constraints at financial institutions related to the troubled mortgage-related assets on their balance sheets.
He believes that a program that deals with the troubled assets will allow the Fed"s rate cuts to translate into significantly lower borrowing costs.
Merrill Lynch analysts note the Fed's announcement to purchase a significant amount of MBS has had a positive impact on mortgage rates, but its success remains to be determined. Lower rate levels must be maintained, which is not so easy as servicers hedging activity has been a factor in this.
Analysts said this is drawing to an end and that if the market continues to rally, IOs will become less negative in duration and cause servicers to become net sellers of duration rather than buyers. Alternatively, if rates rise and coupon swaps expand, servicers will also need to sell. Merrill analysts said this means that there could be more downside risk than upside risk that will begin to show from servicer flows. This would make maintaining lower rates more difficult if this activity begins to emerge, they said.
Then there is the current difficulty by many borrowers to access the improved mortgage rates. If the GSEs remove the reappraisal process for streamlined mortgages, this would help many borrowers. However, it would only help those borrowers with existing agency loans and not non-agency borrowers.