Could this be a positive sign for heavily criticized plan?
Finally, mortgage rates have gone down below 5 percent. Freddie Mac announced that average rates on 30-year fixed-rate mortgages fell to 4.98 percent, down from 5.03 percent the previous week. This is clearly attributed to the proposed $1.2 trillion worth of government assistance that seeks to buy toxic assets and help the economy get back on its feet.
The Mortgage Bankers Association reports that its weekly application index rose 32.2 percent for the week ended March 20. The index reached 1159.4, up from 876.9 a week ago. In the company’s press release, Orawin Velz, Associate Vice Pesident of Economic Forecasting said, “Mortgage rates fell sharply to low levels not seen in six decades following the Federal Reserve’s announcement on the Treasury bond and mortgage-backed securities purchase programs. The drop offered a sizable refinance incentive for most homeowners sparking a pickup in refinance activity.”
What we have here is an observed increase in buyer confidence that was stalled for weeks because the Treasury’s rescue plan took a longer time to provide the details. In other words, it’s just waiting to happen on the part of bond traders whose market reaction is instantaneous. They’d purchase what they can in light of good news.
However, we expect rates to go back above 5 percent next month. Remember, mortgage rates depend on Treasury bonds. Banks that offer mortgage-backed securities pattern their mortgage rates after the Treasury markets’ rates but at a higher percentage. This is done to provide profits for the bank but at the same time contain the effects of substitutes. When bond traders’ euphoria wanes down, they’d be seeking to sell their bonds in order to profit. Adding more pressure is the U.S. dollar’s loss of strength against other currencies. When dollar-denominated bonds lose their value, mortgage rates start to pick up to gain demand.
One more thing that could spoil the good run of mortgage rates is the lingering credit market freezing. Since there are majority of non-bank lenders, capital building will be difficult to match refinancing applications. That would just thwart the high numbers that the MBA is releasing.