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Crisis may lead to low mortgage rates

Bloomberg News / October 9, 2008
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WASHINGTON - There are few bright spots for consumers who have seen the Standard & Poor's 500 index drop more than 30 percent this year. Lower mortgage rates may be one of them.

A nationwide survey of consumer credit rates showed 30-year fixed-rate mortgages averaged 5.8 percent Tuesday, according to Bankrate.com. Rates were 6.26 percent on Aug. 29 and also July 31, in the same survey. Home loan applications rose 2.2 percent last week, according to the Mortgage Bankers Association, and purchases were at a six-year low the previous week.

"From the standpoint of a home buyer, interest rates aren't in any way a barrier," said Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla. A bigger problem, he said, may be the higher down payments many lenders are requiring.

Mortgage rates are relatively low now, and they'll get cheaper if there's a recession, said David Burrows, president of Crescent Mortgage in Arlington, Va. Policy makers will do whatever it takes to keep loans cheap if economic indicators continue to point toward a recession, Burrows said.

"If we're going into a recession, that will be good for rates," Burrows said. "If we're getting hit on everything else, they'll have to keep rates down."

Fixed mortgage rates generally track long-term rates such as the 10-year Treasury note, so the Fed's half-a-percentage point reduction in their benchmark rate yesterday is unlikely to have much effect, according to McBride. Mortgage rates are more dependent on the overall outlook for the economy and inflation, he said.

Rates aren't as low as earlier this year. The average 30-year fixed-rate mortgage was 5.5 percent in January. At Tuesday's rate of 5.8 percent, monthly borrowing costs for each $100,000 of a loan would be about $587, up $19 from January.

"There is so much uncertainty that banks are repricing mortgage loans on a daily, hourly, and even subhourly basis now," said Grant Stern, a mortgage broker and owner of Morningside Mortgage Corp. in Miami Beach, Fla.

Rates are low enough that some consumers may want to pull the trigger on a purchase or refinance if they can lower their payments.

The current situation is the reverse of what it was for much of this decade. Instead of easy credit, with consumers able to borrow against home equity to reduce credit card debt, pay for college, or buy a car, they will see tighter lending conditions.

More Americans purchased previously owned homes in August as mounting foreclosures pushed down prices. The index of pending home resales rose 7.4 percent, the most since October 2001, after falling 2.7 percent in July, the National Association of Realtors said.

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