Home loan rates hold

Fed's rate cut has little effect on mortgage costs

Overnight vs. 30 years

For homeowners, any reductions to be slow, small

April 22, 2001|By Robert Nusgart | Robert Nusgart,SUN REAL ESTATE EDITOR

Admit it. You were psyched.

For a couple of weeks, you've been "floating" your mortgage interest rate, hoping to time it just right to lock in and get the best possible rate offered by your lender.

Then, around 11 a.m. Wednesday, it happens. The Federal Reserve surprises everyone with a half-percentage-point cut in the overnight lending rate. The Dow Jones industrial average zooms up 400 points. The Nasdaq soars 156 points. Your battered 401(k) starts to look a whole lot better.

You pat yourself on the back and call your loan officer, expecting him to tell you that the 30-year fixed-rate mortgage has followed suit and has dropped from 7.5 percent to 7 percent, in a similar Fed-like reduction.

"People think because they hear the Fed lowered the interest rate a half-percent, their mortgage rate went down a half-percent. There is a huge difference between an overnight rate and a 30-year rate. There is a little more risk," said Tom Champion, manager of the Lutherville office of Wells Fargo Home Mortgage.

The timing of the cut, coupled with an anticipation of another quarter-point rate cut at the Fed's next meeting, May 15, did help out some borrowers toward the end of the week, but in the reality of today's mortgage markets, rate reductions aren't that swift or sizable.

In the past month, fixed-rate mortgages have been drifting higher. From a low of 6.89 percent March 23, the Freddie Mac weekly 30-year, average fixed-rate mortgage climbed to 7.14 percent as of Friday, up from 7.04 the previous week.

Champion said Wells Fargo's 30-year fixed-rate as of Thursday reflected a quarter-point drop from Wednesday - from 7 3/8 to 7 1/8 , the same as it was March 19.

"This kind of brings us back to where we were," Champion said, emphasizing that pricing on mortgage rates changes every day by midmorning.

According to HSH Associates, a New Jersey firm that tracks and analyzes mortgage rates, the average 30-year fixed-rate mortgage in the Baltimore metropolitan area finished the week at 7.22 percent, up from 7.12 a week before.

"The only thing that it has done today is stop the rise in interest rates today," said Keith Gumbinger, vice president of HSH Associates.

Gumbinger, however, added that homeowners with home equity lines of credit will get the most benefit since the Fed cut prompted many lenders to lower their prime rate, to which many lines of credit are linked.

Generally speaking, good news for stocks usually depresses mortgages.

"Anything that is good for the stock market isn't necessarily good for mortgage interest rates," said Theodore "Chip" Reichhart, president of First Horizon Home Loans MNC Division, who said rates for his company were unchanged at 7 1/8 from Wednesday to Thursday.

The pricing for mortgage rates that consumers see is tied to mortgage-backed securities, which are keyed off the bond market, mainly the 10-year Treasury security.

Lenders look to the 10-year benchmark because mortgages rarely are kept for 30 years, even though they are made for that period of time. The yield on the 10-year Treasury security rose from 5.14 on Wednesday to 5.30 on Thursday.

"What happens is that money goes out of the bond market ... and goes back into the stock market, which helps that, but it doesn't help mortgage interest rates," Reichhart said.

When money flows from the bond market, the price of bonds go down and yields rise, and usually mortgage rates follow. When Wall Street gets the jitters about inflation or recession and pulls money from the stock market and puts into the safety of bonds, the price of the bonds rises and the yields fall, and mortgages do likewise.

"Generally anything that is bad for the economy is good for interest rates," Reichhart added. "So if the unemployment rate bumped up 1 percent tomorrow, that would probably do more for reducing these rates than the half-percent cut."

Another reason why mortgage rates may not have reacted to the Federal Reserve's move is that bond traders already had anticipated the half-point cut. Rates may ease somewhat as bond traders begin pricing in the next expected cut in May.

"The news is that it was a little bit sooner and a little bit stronger, but nonetheless a lot of it was already in the [mortgage] rates anyway," said Robert Van Order, chief economist for Freddie Mac, the quasi-government-chartered company that supplies funds to lenders by purchasing mortgages and then reselling them as securities on Wall Street.

"You would have preferred to have seen the economy ... deteriorate, because that would have brought you lower mortgage rates," Gumbinger said.

"Now the Fed has come out and cut rates. ... The likelihood is that they are not going to continue to go down, but merely they have stopped rising."

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