Mortgage rates declined for the second week in a row and are near or at record lows for 2011. 

Freddie Mac reported 30-year fixed mortgage rates averaged 4.78% in the week ending April 28, down two basis points from last week and is just seven basis points above the low for this year. 

Meanwhile, 15-year fixed and 5/1 hybrid ARMs are at record lows for the year at 3.97% and 3.51%, respectively, compared with 4.02% and 3.61% last week. One-year ARM rates are at a new record low of 3.15%, one basis point lower from last week.

The decline in mortgage rates should buoy refinancing activity in the next Mortgage Bankers Association report.  For the week ending April 22, the Refinance Index was not adjusted for the Good Friday holiday and reported essentially flat at ~1964.

However, as a percent of total applications, refinancing share increased to 61.6% from 58.5%.  ARM share has also gained recently as a result of the attractive levels to 6.5% share from 5.9% in early April.

At current mortgage rate levels similar to earlier this year, the Refinance Index has been in the 2400 area and is not likely to move beyond that unless mortgage rates drop substantially more. 

Deutsche Bank Securities analysts said that secondary-primary MBS spreads will react asymmetrically to interest rate changes beyond this point. Spreads therefore are expected to widen, limiting the mortgage rate decline, if the market continues to rally. 

Analysts added that this is good news for convexity as duration won't shorten as much as models predict and prepayments will stay muted.

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