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Mortgage Rates' Rally Feeble, Fleeting

Mortgage rates barely changed this week, after recovering slightly last week from the steepest four-week decline since October 2003.

The average rate on a 30-year, fixed-rate mortgage decreased by 1 basis point to 5.67% during the week ended Thursday, according to a survey by Freddie Mac(FRE - Cramer's Take - Stockpickr). (A basis point is 1/100th of a percentage point.) Discount fees remained at 0.4 point. The rate remains far below last year at this time, when 30-year FRMs averaged 6.28%.

"Long-term mortgage rates were little changed this week, largely in sync with the movements in the Treasury bond yields during the same time," Frank Nothaft, Freddie Mac vice president and chief economist said in a release.

Rates on 30-year fixed-rate mortgages tend to follow 10-year Treasurys, which broadly measure inflation, growth, and other economic expectations. But, of course, while the mortgage rates are fixed, the spread is whatever the market demands. So it's lower when money is looking for a new home.

 

As investors and would-be homeowners were heating up the housing market, cash was abundant.

"There was tons of liquidity, tons of cash which needed a place to go," says Philip van Doorn, analyst at TheStreet.com Ratings. "Mortgage securities [were] one of the places to get a better deal." And with investment banks buying non-conforming loans and competing with Fannie Mae(FNM - Cramer's Take - Stockpickr) and Freddie Mac for conforming loans, interest rates fell relative to treasuries.

But with the housing boom dead, the spread has been trending upward since last summer. There's less cash available, and Wall Street isn't throwing money at mortgage-backed securities. The result: at the end of January 2007, 30 year FRMs were running barely 1.4 percentage points above 10-year Treasurys, and for the past few weeks they've been hovering about 2 percentage points higher.

Other mortgage rates also remained relatively stable on the week.

Rates on 15-year FRMs fell 2 basis points to 5.15% with an average 0.4 point; rates on five-year Treasury-indexed hybrid adjustable-rate mortgages fell 11 basis points to 5.21% with an average 0.4 point; and the rates on one-year Treasury-indexed ARMs fell 2 basis points to 5.03%, with an average 0.5 point.

Freddie Mac surveys lenders about rates on conventional mortgages of less than $417,000 to borrowers with good credit.

The survey doesn't reflect rates on jumbo loans of over $417,000 or loans to borrowers with weak credit.

Freddie Mac's numbers are averages. You can search for the best rates offered by lenders in your area on manybanking.com. Just make sure you understand whether the lender is discounting the rate it quotes you by charging a "point," or fee, based on the size of the loan.

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