Freddie Forecast 6.3% Fixed Rate During 2nd Half of Year

May 14, 2004

Rates jump, apps off

By Coco Salazar

Rates soared after another strong employment report and more loan applicants opted for adjustable-rate mortgages (ARMs) bringing the share of these applications to the highest level in nearly a decade. Even as the outlook for rates remains highly volatile, an industry giant forecasted the long-term rate average will stay near the current level throughout the end of the year.

The 30-year fixed-rate mortgage averaged 6.34% -- up a whopping 22 basis points from last week, according to Freddie Mac's latest survey of 125 thrifts, commercial banks and mortgage lending companies. Last year at this time, the 30-year was 5.45%.

The 15-year average reportedly jumped 25 BPS from last week to 5.72%.

Freddie said the 1-year Treasury-indexed adjustable-rate mortgage (ARM) average jumped to an eight-month high as it rose to 3.90% from 3.76% last week. The ARM share of total mortgage applications increased to 34.8% from 32.1% the previous week, the Mortgage Bankers Association of America (MBA) reported.

While the huge surge in last month's employment figures reaffirmed market expectations that the Fed will move sooner now rather than later and fueled the jump in mortgage rates, Friday's results of the Consumer Price Index, a measure of inflation, should be "a deciding factor for the Fed in determining the timing of future action," Freddie chief economist Frank Nothaft said in a statement.

The Fed, or Federal Reserve Board, has kept the federal funds rate at 1% for months now. The rate represents what banks charge one another for overnight loans and when it goes up, so do prime rates and rates for many types of consumer loans. In March, the CPI reportedly experienced the largest increase in two years, and the MBA said in its forecast last month that inflationary pressures could make the Fed change the federal funds rate as early as June.

Inflationary worries persist and it is expected "interest rates will remain highly volatile for some time," but Freddie forecasts that the 30-year fixed-rate mortgage will average 6.3% throughout the last half of the year, according to its May economic outlook.

In late trading Thursday afternoon, the 10-year treasury note had a 4.85% yield and price of 93 14/32. A week ago, the note closed at 4.62% yield.

This week at -- which says it surveys mortgage bankers, brokers and other industry experts who provide residential first mortgages to consumers to predict the direction of mortgage rates over the next month and a half -- 50% of the panel voted rates will rise, 37% said they'd remain unchanged (plus or minus 2 BPS) and the remaining 13% forecasted a downturn.

Overall applications decreased, as reflected in the Market Composite Index, which fell 5.0% from the previous week to 742.2, according to the MBA's latest Weekly Mortgage Applications Survey. A year ago, the index stood at 1417.8.

Refinance application activity reversed course and again showed signs of contraction as shown in the Refinance Index, which dropped 13.2% to 2184.6, MBA reported. The refinance share of total applications decreased to 39.8% from 44.0% the previous week.

The Purchase Index continued to increase, this time by 2.4% to 494.3, the report said.

The latest application activity results fall in line with Freddie's recent outlook. The mortgage giant forecasts that the refi share of applications will drop to 42% in the second quarter from 59% in the first quarter and to continue falling as rates gradually rise. Meanwhile, purchase-money origination volumes are expected to set a new record in 2004.


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