Mortgage rates tumble to low level; Fed rate cut may be imminentINTEREST RATE ACTIVITY

Mortgage rates tumbled to their lowest level in four months as a shockingly downbeat employment report convinced investors that a Fed rate cut is at hand.

The benchmark 30-year fixed-rate mortgage fell 22 basis points, to 6.28 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.43 discount and origination points. One year ago, the mortgage index was 6.44 percent; four weeks ago, it was 6.68 percent. That's a drop of 40 basis points in a month.

The benchmark 15-year fixed-rate mortgage fell 22 basis points, to 5.96 percent. The benchmark 5/1 adjustable-rate mortgage fell 15 basis points, to 6.3 percent.

Before Friday, bond traders had been indecisive ahead of next week's meeting of the Federal Reserve's rate-setting committee. That changed when the Labor Department reported that the economy shed a net 4,000 jobs in August. Investors and economists had been expecting an increase in nonfarm payrolls of about 100,000, give or take 10,000. A decrease in jobs wasn't even on the radar screen.

Rate cut or not?

Even before the August employment report was released, speculation was building that the Federal Reserve would reduce short-term interest rates at its regularly scheduled Sept. 18 meeting. There was a lot of disagreement over whether a rate cut would happen. Those expecting a cut pointed to the plunging home sales and house prices in major markets. Naysayers responded that wages are rising and the overall economy is expanding.

Then came that August jobs report, and everyone began predicting a Fed rate cut next week. According to the Chicago Board of Trade, futures traders have priced in a 72 percent probability of a half-point decrease in the target federal funds rate and a 28 percent chance of a quarter-point cut.

A Fed rate cut would have a direct effect on consumer debt that's linked to the prime rate -- home equity lines of credit and some credit cards. As for long-term debt, such as fixed-rate mortgages, the connection to Federal Reserve rate policy is tenuous. Sometimes mortgage rates go down when the Fed cuts rates, but sometimes they rise or stay about the same.

"The two do not work hand in hand," says Jim Sahnger, a mortgage consultant with Palm Beach Financial Network in Stuart, Fla. "In many cases, the Fed will drop, and the inverse occurs, where now you have a devaluation of the dollar or anticipation that inflation will ramp up later, and now you have a spike in mortgage rates."

The last time the Fed cut rates was June 25, 2003. That was the last of 13 straight rate decreases that began Jan. 3, 2001. When you look at what had happened to the 30-year fixed five weeks after each Fed rate cut, there is no pattern: In seven of the 13 instances, mortgage rates went down; in five cases, mortgage rates went up, and the 30-year fixed was unchanged one time.

"For anyone pinning their hopes that mortgage rates will decline based on a Fed rate cut, don't get too excited," Sahnger says. "Your best chance to get a great rate could well be today."