Mortgage rates dip; refinances in boom

The average interest rate on 30-year mortgages fell to 5.64 percent yesterday - the lowest in six months and a surprise for a housing industry that had barely caught its breath from last year's record wave of about $2 trillion in refinancing nationally.

Industry analysts attribute the recent fall in rates to continued weakness in the nation's labor market, which has raised questions about the strength of the economic recovery. Several also said they expect it to be temporary and expect rates to rise as employment figures improve with other economic indicators.


The new average reported by Freddie Mac, the nation's second-largest purchaser of mortgages, is the lowest since June, when rates hit what industry officials believe was a 45-year low of 5.21 percent. That touched off a record binge of refinancing and homebuying. Mortgage originations hit a record $3.4 trillion last year, with refinance applications accounting for 60 percent of the total.

Because of the rate drop, the mortgage finance industry - which months ago was preparing to lay off tens of thousands of employees as the refinancing boom faded - finds itself swimming in new applications.


"This time last week, I would say things were fairly slow," said Dee Ziccardi, a mortgage banker with AccuBanc in Lutherville. "This week, I am so busy."

The Mortgage Bankers Association, which tracks mortgage activity, said its seasonally adjusted index for loan applications increased 30.4 percent in mid-January. Refinancing applications jumped 51 percent from the previous week, and the index for new mortgages climbed 12.5 percent, the industry group said.

Thirty-year mortgage rates were expected to go nowhere but up when Amy Benson and Kevin McGuigan started shopping for their first house about three weeks ago. Now, the couple, who are engaged to be married, have a new reason to find a house quickly.

"It's just kind of a happy circumstance," said Benson, 24, as she and her fiance were busy trying to negotiate a price yesterday for a house in Lutherville. "It definitely helps make it a little more affordable."

The latest dip in rates caught many in the mortgage industry by surprise. With the economy rebounding and the stock market showing strong gains after a prolonged slump, many expected to see rates continue their upward climb.

"It is ironic that we're talking about mortgage rates being at a six-month low and being in the 5.6 percent neighborhood at a time when we are seeing robust economic expansion," said Greg McBride, senior financial analyst at, which tracks mortgage interest rates.

The latest slide in rates started about two weeks ago, when the Labor Department reported that the economy added only 1,000 jobs in December, far below the 150,000 or so that economists had expected. That was followed by comments from Ben S. Bernanke, vice chairman of the Federal Reserve, suggesting that the labor market was weaker than many realized.

That news drove Treasury yields down, taking mortgage rates along for the ride.


"The lack of job growth and low inflation have not only kept mortgage rates low, but they have contributed to the recent decline," McBride said.

Industry analysts disagree on how long rates will stay at these levels. Doug Duncan, chief economist for the Mortgage Bankers Association, said the party may last just a few more weeks.

Come Feb. 6, he said, the Labor Department will release its revised employment numbers. He expects the figures on job creation to be revised significantly upward. He also pointed out that the government figures don't take into account the large population of self-employed, who typically grow in number during the tail-end of a recession.

If payroll numbers are revised upward, Duncan said, the bond market will react.

"You will see strong acceleration in the economy, and rates will rise," he said. "Mortgage rates will rise with it."

That means interest rates could top 6 percent again within weeks.


But McBride said economic conditions will remain favorable for homebuyers through the rest of this year.'s recent survey of mortgage lenders suggests that most see rates staying put for the next 30 to 45 days. A third reported that they expect rates to continue falling.

"We are going to have to see some pretty significant job growth just to get rates back up to the 6 percent mark," he said.

Meantime, mortgage applicants can take advantage of fierce competition within the finance industry. Mortgage companies went on a hiring binge during the refinancing boom of the past few years, and many new entrants joined the market. Competition has forced lenders to shrink the profit they make on each loan they approve.

"There's going to be some profit bleeding until that excess capacity is gone," Duncan said.

The Mortgage Bankers Association estimates that the mortgage finance industry will shrink employment by 18 percent this year, resulting in about 64,000 layoffs. Employment in the industry peaked at 435,000 in August last year. The estimate doesn't include jobs at banks, which don't list mortgage employees separately.

The layoffs will continue into next year, until about 100,000 employees are taken out of the business, Duncan predicted.


Several large home-loan providers have announced layoffs. Washington Mutual Inc. and Countrywide Financial Corp. said last month that they expected to trim several thousand jobs.

For now, Ziccardi, the Lutherville broker, isn't too worried. In her six years with AccuBanc, she can't recall any layoffs at the firm. And the applications keep coming in.

"Anybody who can get less than 6 percent to get into a house today - they have to realize that that is still an awesome interest rate," she said.