After holding steady through much of February and early March, rates on fixed-rate mortgage loans rose this week in the wake of reports that suggest the economy continues to mend.
As investors' appetite for risk grows, they lose interest in mortgage-backed securities that fund most mortgage loans. The Federal Reserve is also contemplating whether to continue MBS purchases at the current $40-billion-a-month pace.
Although the Fed is likely to continue its latest "quantitative easing" program for the time being, economists at Fannie Mae think rates on 30-year fixed-rate loans could be headed above 4 percent this year.
Rates on 30-year fixed-rate mortgages averaged 3.63 percent for the week ending March 14, up from 3.52 percent last week but down from 3.92 percent a year ago, Freddie Mac said in releasing the results of its latest Primary Mortgage Market Survey. Rates on 30-year fixed-rate loans hit a low in Freddie Mac records dating to 1971 of 3.31 percent during the week ending Nov. 21, 2012.
For 15-year fixed-rate mortgages, rates averaged 2.79 percent, up from 2.76 percent last week but down from 3.16 percent a year ago. Rates on 15-year fixed-rate loans hit a low in Freddie Mac records dating to 1991 of 2.63 percent during the week ending Nov. 21, 2012.
For five-year Treasury-indexed hybrid-rate mortgage (ARM) loans, rates averaged 2.61 percent, down from 2.63 percent last week and 2.83 percent a year ago. That ties an all-time low in Freddie Mac records dating to 2005 last seen during the week ending Feb. 28.
Rates on one-year Treasury-indexed ARM loans averaged 2.64 percent, virtually unchanged from 2.63 percent last week, but down from 2.79 percent a year ago. Rates on one-year ARM loans hit a low in records dating to 1984 of 2.52 percent during the week ending Dec. 20, 2012.
Looking back a week, a separate survey by the Mortgage Bankers Association showed applications for purchase loans during the week ending March 8 were down a seasonally-adjusted 3 percent from a week earlier, but up 9 percent from a year ago. Requests for refinancings accounted for 76 percent of mortgage applications, the lowest level since May 2012.
Rates on 30-year fixed rate mortgages dropped below 4 percent at the end of 2011, pushed down by investor demand for low-risk mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.
As investors gain confidence that the economy is recovering, more money flows into riskier investments like stocks, and demand for safe bets like MBS and Treasurys diminishes. Reduced demand for bonds and MBS pushes up their yields.
Economists at Fannie Mae last month projected that rates on 30-year fixed-rate loans will climb back above 4 percent during the final three months of this year, and average 4.4 percent in 2014.
Although the Federal Reserve has also helped keep a lid on interest rates by buying up Treasurys and MBS, there's growing speculation about how long, and how strong, a role the Fed will continue to play.
An initial round of "quantitative easing" by the Fed that wrapped up in 2010 included $1.25 trillion in purchases of Fannie and Freddie debt and MBS, helping push rates on fixed-rate mortgages below 5 percent.
In September, the Fed announced it would resume its purchases of MBS guaranteed by Fannie and Freddie, at the rate of $40 billion a month. The Fed's also buying $45 billion in Treasurys every month as part of its third round of quantitative easing, or QE3.
After its most recent Jan. 30 meeting, the Fed's Open Market Committee said the Fed will continue some level of quantitative easing if the outlook for the labor market does not "improve substantially."
But in releasing their latest forecast last month, economists at Fannie Mae said they expected that QE3 will continue only through the end of this year, and total $1 trillion in asset purchases, compared to previous expectations of nearly $1.5 trillion in purchases through the first quarter of 2014.
Last week's jobs report showed the unemployment rate dropping in February to its lowest level since December 2008. The Bureau of Labor Statistics report estimated that nonfarm payroll employment added 236,000 jobs to the economy, bringing the unemployment rate down from 7.9 percent in January to 7.7 percent in February.
"The announcement of stronger than anticipated job growth last week led to an increase in interest rates, with the 30-year fixed mortgage rate in our survey reaching the highest level in more than six months," said Mike Fratantoni, the MBA's vice president of research and economics, in a statement.
Although few observers expect the Fed to wind up QE3 right away, it could alter the pace and composition of its Treasury and MBS purchases in coming months.
Addressing mortgage bankers at an MBA conference in Colorado last week, Federal Reserve Board Governor Elizabeth Duke said she thinks the impetus the Fed's MBS purchases can provide to housing is appropriate for three reasons: the "extraordinary damage" housing markets have suffered, the limited role housing investment has played in the recovery so far, and the fact that mortgage underwriting standards remain "quite tight."
(Duke site on the Federal Open Market Committee, but emphasized that her views "may not be in accord with those of my colleagues.")
While Duke thinks "the evidence is pretty clear that a recovery in the housing market is finally under way," she expects that the full impact of low mortgage rates won't be felt until lenders loosen up, which she expects "will be a slow and gradual process."
While the Fed's monetary policies have probably supported investor demand for home purchases, Duke said, there's little evidence that they've spurred purchases by "owner-occupiers."
In 2011, purchase mortgage originations hit their lowest level since the early 1990s, and remained near these subdued levels in 2012 even as mortgage rates hit historic lows, Duke said.
The drop has been most pronounced among those with low credit scores, she noted. While purchase originations fell 30 percent between 2007 and 2012 for borrowers with credit scores above 780, they fell 90 percent among borrowers with credit scores in the 620 to 680 range.
Duke said lenders are still concerned that they will be required to buy back loans that go into default from Fannie and Freddie, and that new mortgage servicing standards make servicing nonperforming loans more costly.
Although purchase loan originations have remained nearly flat at a time when interest rates have hit historic lows, Duke said she still believes that monetary policy is effective in stimulating the housing market and the broader economy.
The effect of lower mortgage rates has still not been "fully transmitted" to the economy, she said, because tight credit has prevented many buyers from taking advantage of the reduced cost of borrowing.
"Any improvement in credit conditions would thus act to improve the efficacy of MBS purchases," Duke said. Conversely, policies that constrain mortgage lending or increase costs would reduce the impact of the Fed's policies.
Unemployment isn't the only issue on the Fed's radar. Low interest rates have spurred a refinancing boom that's expected to die out now that most homeowners who were able to refinance have done so.
Duke said that as refinancing business dries up, MBS issuance could also slow, meaning the Fed's MBS purchases could have an even bigger impact on mortgage markets. The Fed might have to adjust the pace of its MBS purchases in response.
Such an adjustment "could result in an increase or decrease in the pace of total (MBS and Treasury) purchases, or it could lead to a change in the composition of purchases," she said.
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