BUSINESS: Mortgage rates fall, defying predictions
08:42 PM PDT on Monday, August 8, 2011
Those economic experts who predicted that Standard & Poor's downgrade of U.S. debt would cause mortgage interest rates to rise were proven wrong Monday when instead mortgage rates fell.
Rates on 30-year conforming mortgages averaged 4.28 percent, falling from last week's average of rate of 4.48 percent, and hitting a new low for the year, according to MonitorBankrates.com.
Mortgage rates continued a tumble that started last week on fears of another U.S.recession.
The drop in mortgage rates Monday coincided with a sharp decline in interest paid on 10-year Treasury bonds, to which mortgage rates are closely linked. Falling Treasury bond yields were triggered by burgeoning investor demand for U.S. debt even after Standard & Poor's move late Friday, after the stock markets had closed, to downgrade U.S. debt a step from is top AAA rating to AA+.
"Forecasters and investors originally expected (interest on) Treasuries and mortgages to rise," said Anika Khan, an economist with Wells Fargo Securities, in anticipation that the bond downgrade would make Treasuries a less attractive investment.
Instead, she said, more investors rushed to buy government bonds because Treasuries looked more secure than the stock market, which dropped more than 5 percent because of economic uncertainty.
"The turmoil that exists in Europe, Asia and here suggests the global economy will slow down significantly, which means stocks are not as attractive and everyone is jumping to buy gold and Treasuries," said Chapman Universityeconomist Esmael Adibi.
Stocks continued to plunge -- and Treasury bond and mortgage interest rates fell, too -- after S&P early Monday also downgraded the credit ratings of lendersFannie Mae, Freddie Mac and other agencies linked to long-term U.S. debt.
Credit downgrades of the mortgage giants Fannie and Freddie reflected their "direct reliance" on the U.S. government, S&P said. Fannie and Freddie together account for more than half of existing first mortgages and almost all new mortgage loans.
It would be logical to think that the downgrade would force Fannie and Freddie to pay more to borrow money and pass on that cost in higher mortgage interest rates, Adibi said. But he said because Fannie and Freddie are in federal conservatorship, they are capitalized with the same U.S. debt that investors are devouring.
Dustin Hobbs, spokesman for the California Mortgage Bankers Association, said the association's members expect that while the shaky economy will keep mortgage interest rates low and spur home refinancing, it "could have a negative impact on home purchases because of the effect on consumer confidence."
Wil Herring, the broker-owner of Baxter Wellington Real Estate in Moreno Valley, said some of his clients looking at houses over the weekend were nervous that mortgage rates would go up this week.
"My current clients don't want to wait and don't want to take the chance that interest rates will knock them out of the market," Herring said.
Greg McBride, senior financial analyst for Bankrate.com, said as long as the economy remains weak, mortgage rates will remain at attractive levels. "People who worry about interest rates skyrocketing have their worries in the wrong place," he said.
The Associated Press contributed to this report.
Reach Leslie Berkman at 951-368-9423 or lberkman@PE.com
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