Fed's finger in the dike on mortgage rates

In the wake of this week's sharp rate cut by the Federal Reserve, mortgage interest rates dipped to their lowest level in at least four years -- perhaps presenting a strong opportunity for people who have been waiting to refinance adjustable-rate mortgages (ARMs) or those who have been waiting to buy.

This week, 30-year fixed-rate mortgages averaged 5.48 percent with 0.4 points, according to a national survey by Freddie Mac, a government-sponsored mortgage-finance company. The average 15-year mortgage stood at 4.95 percent, and the average five-year adjustable dropped to 5.13 percent.

Freddie Mac's chief economist, Frank Nothaft, suggested that low rates could help stabilize the housing market by the second half of this year. Others, however, say the decline in rates won't be enough to revive the market, in large part because lenders aren't willing to take the risks they took two years ago -- when nearly anyone who could fog a mirror could get a loan.

"Reduced rates alone can't fix this market," said Faith McGown of Coldwell Banker Burnet. "I'm not a proponent of the overzealous lending that contributed to the mess we're in now, but I think we've got to get investors and other buyers back into the market to absorb some of this excess inventory."

There's evidence that this week's 0.75-percentage-point cut in the federal funds rate is spurring some activity. Rick Aneshansel, chief financial officer for U.S. Bank Home Mortgage in Minneapolis, said that refinance activity already is up dramatically; part of that, he said, was happening before the rate cut, but it has picked up since then. In 2007 the company never had a month when it processed more than $3.8 billion in loan applications, but at this point it is on track to do more than $6 billion in January.

"Consumer response has been great," Aneshansel said, noting that nearly 70 percent of those applications are for refinancings.

The local office of Countrywide Financial Corp., the nation's largest mortgage company, is also reporting significant increases in application activity at a time when the market is normally dormant.

Alex Stenback, who runs CTX Mortgage in Plymouth and is host of a mortgage blog, www.behindthemortgage. com, said that long-term mortgage rates often rise in the wake of a federal funds rate cut, because investors expect those cuts to stimulate the stock market.

The stock market stabilized, but investors still sought refuge in safe long-term bonds, causing bond yields to fall, which they did immediately after the rate cut. But they have since risen to levels at or slightly above pre-rate-cut levels. A healthy stock market is usually a sign that mortgage interest rates will increase as competition for investors increases.

"It all depends on whether or not the market is expecting the Fed's 'medicine' to work, work well, or not work at all," said Keith Gumbinger of www.hshassociates.com.

Gumbinger said that pessimism about the economy, flight-to-quality purchases of 10-year Treasury bonds and the Fed's latest rate cut have "all served to lower long- and short-term rates collectively and to differing degrees."

On Friday the yield of the benchmark 10-year Treasury note dipped to 3.63 percent, down from 3.71 percent late Thursday.

Those rates won't benefit everyone, however. You'll need good credit, a decent payment history and an income to qualify for a mortgage or a refinancing.

Like many real estate agents these days, Michael Sharp, a sales agent with Re/Max Results in Minneapolis, is hopeful that the decline in rates will at least give buyers who are on the fence some incentive to make a decision.