Mortgage Rates Decline to Multi-Month Lows

The most recent Weekly Primary Mortgage Market Survey, conducted by Freddie Mac, revealed a significant drop in mortgage rates. “The average rate for a 30-year fixed-rate mortgage was 5.12 percent, down from 5.29 percent the previous week, Freddie Mac said. At this time last year, the average rate for 30-year fixed-rate mortgages was 6.47 percent.”

Rates are now at their lowest-levels since the week of May 28, when they averaged 5.91%. Moreover, the decline has not been limited to 30-year fixed rates, which is the most popular type of mortgage, and hence the most oft-cited. “The average rate on a 15-year fixed-rate mortgage was 4.56 percent, down from 4.68 percent the previous week…Rates on five-year, adjustable-rate mortgages averaged 4.57 percent, down from 4.75 percent a week earlier.” One-year ARMS and jumbo mortgage rates fell proportionately.

While most analysis/prediction tends to focus on the demand side – implicitly seeking to establish whether mortgage rates are low enough to draw in buyers – it seems that the recent rate declines are a product of supply-side changes. By now, most laypeople are probably at least somewhat familiar with the securitization process (if not because of the pernicious role it played in the credit crisis), which bundles individual mortgages into large pools, in order to dissipate risk and sell them to investors.

Well, it turns out, that these pools of mortgages (known in industry parlance as Collateralized Mortgage Obligations [CMOs]), has been particularly strong in recent weeks. Investors are growing more confident (some would say complacent) about the risk posed by such securities, especially with respect to current prices: “Non-agency home-loan bonds have soared from record lows as investors reduced the yields they targeted amid signs that the deepest housing slump, worst financial crisis and longest U.S. recession since the Great Depression are easing.”

The US government (via the Treasury Department) and the Federal Reserve Bank have also been active. Specifically, there is “speculation that Treasury Secretary Timothy Geithner’s Public-Private Investment Program, or PPIP, will add as much as $40 billion of demand,” while the Fed’s “Holdings of mortgage-backed securities jumped $66.6 billion to $609.5 billion” last week, as part of its $1.25 Trillion plan to boost the housing market.

Going forward, it’s unclear whether these government purchases will continue. Already, the “Treasury and Federal Reserve said in a statement today that ‘they do not anticipate any further additions to the types of collateral that are eligible for’ the central bank’s Term Asset-Backed Securities Loan Facility,” which could make private investors wary of holding mortgage securities. Ultimately, such investments will only remain attractive if the housing market continues to stabilize and the foreclosure crisis is brought under control. Stay tuned…