30-year fixed-rate mortgage was back under 6% this week: Freddie Mac

CHICAGO (MarketWatch) -- Long-term mortgage rates dropped sharply this week, while adjustable-rate mortgages barely budged from last week's averages, according to Freddie Mac's weekly survey released Thursday.

The 30-year fixed-rate mortgage averaged 5.87% for the week ending March 20, down from last week's 6.13% average. The mortgage averaged 6.16% a year ago. The 15-year fixed-rate mortgage averaged 5.27%, down from 5.60%. The mortgage averaged 5.90% a year ago.

But adjustable-rate mortgages moved little. Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.56%, down from 5.58% last week. The ARM averaged 5.91% a year ago. And 1-year Treasury-indexed ARMs averaged 5.15%, up just slightly from their 5.14% average last week. The ARM averaged 5.40% a year ago.

To obtain the rates, the 30- and 15-year fixed-rate mortgages required payment of an average 0.5 point, while the 5-year ARM required an average 0.9 point and the 1-year ARM required an average 0.8 point. A point is 1% of the mortgage amount, charged as prepaid interest.

"Mortgage rates fell this week as various actions were taken to improve market liquidity," said Frank Nothaft, Freddie Mac chief economist, in a news release. "In addition, the inflation report from the Consumer Price Index reflected weaker price increases than consensus expectations. Unchanged in February both including and excluding food and energy costs, it is the first time the core CPI did not report a monthly increase since November 2006."

Nothaft also said that the condition of the economy might be weaker than previously thought judging from retail sales figures that fell by 0.6% in February, contrary to the consensus forecast of a 0.2% increase.

"Slowing consumer spending and weak employment conditions are among the concerns behind the Fed's decision to lower the target federal funds rate by 0.75 percentage points in the most recent Federal Open Market Committee meeting," Nothaft said.

On Wednesday, the Mortgage Bankers Association reported that average interest rates on fixed-rate mortgages

Reasons for the fall

Market conditions have sent mortgage rates on a roller coaster ride since the beginning of the year. For the week ending Jan. 24, the 30-year fixed-rate mortgage plunged to a 5.48% average; by the last week of February, it averaged 6.24%, according to Freddie Mac.

This most recent drop, however, comes from a few factors that evolved over the past week, said Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers.

For one, the Bear Stearns announcements caused a scare in the stock market and shifted investor attention toward bonds, Nicholas said.

"There has been a flight to quality in the investment market," he said. Yields on bonds go down when demand for them goes up, and mortgage rates often follow the yield trends of 10-year Treasury bonds.

And while there isn't a direct connection between the Fed's rate cut actions and the direction of mortgage rates, bond investors were likely relieved when the Fed cut less aggressively this week than the market had thought it would, he said.

That's because when the Fed lowers rates, it encourages more borrowing and spending -- which has the potential to cause inflation, he said. Bond investors fear inflation because it means the purchasing power of their income stream will be reduced.

Also, the Office of Federal Housing Enterprise Oversight announced on Wednesday it was reducing Fannie Mae's and Freddie Mac's capital requirements, a move that is expected to add up to $200 billion of liquidity to the market for mortgage-backed securities. See full story.

"The liquidity issue is very important," Nicholas said. "The responses that have been coming out from the Fed and OFHEO have been helping to stabilize rates," he said, and long-term mortgage rates could move even lower in coming weeks.