How low will it go? Mortgages: The 30-year, fixed-rate home loan is at its lowest point since the Vietnam War era, prompting homeowners who refinanced months ago to call their lenders to do it all again.

October 11, 1998|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

It didn't take long for Robert Van Order to switch strategies.

Year after year the chief economist for Freddie Mac would refinance a one-year adjustable-rate mortgage on his home in an effort to keep his monthly payments as low as possible.

But a funny thing happened this year. Rates for a 30-year, fixed-rate mortgage kept dropping and dropping and dropping and before long they began to catch up to those "low" adjustable rates.

"I'm getting out of the ARM," Van Order said last week. "I'm going to do a 30-year fixed I've been doing teaser rates for the last few years and refinancing every year but why not."

From the chief economist for the mega-supplier of money for the mortgage industry to first-time homebuyers, those seeking to purchase or refinance a home are enjoying the lowest mortgage rates since Lyndon BainesJohnson sat in the White House.

Chaos in the world's financial markets has caused funds to pour into U.S. Treasury bonds, forcing yields lower. Coupled with the recent Federal Reserve Board's rate cut, which has pushed mortgage rates that were hovering around 7 percent just a couple of months ago down to 6.5 percent.

Interest rates for a 30-year, fixed-rate mortgage fell to 6.49 percent from the prior week's 6.60, according to Friday's Freddie Mac Primary Mortgage Market Survey. That's the lowest since January 1968. Rates for a 15-year mortgage dropped to 6.15 percent.

In contrast, a one-year adjustable-rate mortgage stood at 5.36 percent.

And in the Baltimore metropolitan area, the average 30-year rate dropped to 6.47 -- a 30-year low -- according to HSH Associates, a New Jersey firm that tracks and analyzes mortgage rates.

The Mortgage Bankers Association of America also reported that mortgage applications last week -- when compared to the same week in 1997 -- were up 153.3 percent. In addition, the MBA said, refinancing accounted for 65.5 percent of all applications taken last week compared with 20 percent to 25 percent when rates remain relatively steady for a 12-month period.

Conversely, the percentage of applications for adjustable-rate mortgages continued to shrink, making up only 6.1 percent of the mortgage origination activity.

But have mortgage interest rates hit bottom?

"I think we are bouncing along the bottom. I think it is reasonable to say that," said Keith Gumbinger, vice president of HSH Associates. "There still may be a little downward space yet," he said, but added that HSH expects rates to tick upward in coming months as "economies overseas do what they can to get their economies stimulated."

But Brian Carey, an economist for the MBA, had a differing view.

"We have been reshaping and going over our forecast the last couple of days and have not finalized it," he said. "But I would say we expect rates to probably really hit their lows in the first quarter of 1999, based on our expectations of further Fed rate cuts. We expect at least one by the first quarter of 1999."

Whether rates continue to sink or not, the slide is having a profound effect on the housing and mortgage industry:

* The National Association of Realtors is predicting 4.7 million existing homes will be sold this year, compared with last year's record 4.21 million.

* The MBA is expecting total mortgage dollar volume to reach $1.4 trillion this year, smashing the previous mark of $1.02 trillion set during the refinancing boom of 1993.

* The MBA's Refinance Index -- which tracks the refinance activity of the nation's top 30 lenders -- is already at an all-time high. And homeowners who refinanced 8 percent mortgages last winter to a 7.25 or 7 percent rate, are finding themselves calling lenders again to realize even more savings.

* Adjustable-rate mortgages, invented when rates in the early 1980s hit close to 20 percent, will be used in only the most extreme circumstances.

A homebuyer who selects a one-year adjustable rate mortgage at 5.36 percent with a 2 percent cap will see an adjustment -- when adding in the loan's margin of 2.75 percent -- to a rate of 7.36 percent on its anniversary. Nowadays, that simply doesn't make financial sense.

"I haven't done an ARM in a couple of years. The ARM is dead. The ARM is gone," said Brian Sacks of Allied Bankshares Mortgage in Lutherville. "The spread in the marketplace is such that even the 5- and 7-year [adjustable rate] products are comparable to the 30-year fixed."

"Everybody is jettisoning the ARM," said Tom Champion, manager of the Lutherville office of Norwest Mortgage.

The rush of homeowners who are dumping ARMS for fixed-rate mortgages combined with the sizzling purchase market has loan officers scrambling.

"We are extremely busy. The volume of phone calls has probably tripled," Sacks said, adding, "It is what every mortgage banker prays for, a year like 1998. I've been doing this for 14 years, and this is the year I've prayed for.

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