Mortgage rates dip slightly this week after three weeks on the rise

Mortgage rates finally have calmed down, after swinging wildly up and down in the first few months of the year.

That good news is amplified by the direction that rates took this week: down. The 30-year fixed had risen (modestly) three weeks in a row.

The benchmark 30-year fixed-rate mortgage fell 3 basis points to 6.13 percent, according to the Bankrate.com national survey of large lenders.

The mortgages in this week's survey had an average total of 0.40 discount and origination points. One year ago, the mortgage index was 6.29 percent; four weeks ago, it was 5.96 percent. The benchmark 15-year fixed-rate mortgage remained at 5.71 percent. The benchmark 5/1 adjustable-rate mortgage dropped 9 basis points to 5.87 percent.

ARMs going down

One of the most remarkable effects of the mortgage meltdown has been the demise of adjustable-rate mortgages, or ARMs. During the housing and mortgage boom, more than a third of applicants got ARMs. That has changed, in a big way. According to the Mortgage Bankers Association, just 6.8 percent of applicants asked for ARMs last week -- and that was an increase over the previous week, when the ARM share was 5.9 percent.

There was a frenzy for ARMs when borrowers and lenders were reckless. Now that foreclosures are on the rise, borrowers and especially lenders have become cautious and people are avoiding ARMs.

"There are two things driving it," says Dan Dowling, president of United Mortgage Capital Corp. of Altamonte Springs, Fla. "One is fear."

During the boom, everyone said real estate prices wouldn't fall -- and then they did, in much of the country. Homeowners with ARMs saw their rates adjust upward, but they couldn't refinance because they owed more than their houses were worth and they didn't have enough cash to pay the lender the difference.

That was bad for those victims of faulty judgment and bad timing, and scary for bystanders who want to prevent the same thing from happening to them.

"Borrowers are willing to pay a premium for less risk," Dowling says.

So there's not a lot of demand from borrowers for ARMs. That brings up Dowling's second reason for the dearth of ARMs: reduced supply. Mortgage investors are avoiding ARMs, too. They prefer the more-familiar risk of underwriting fixed-rate mortgages. The default and foreclosure rates on fixed-rate loans have been less than on ARMs. It's that way during this mortgage crisis and it has always been that way. ARMs are riskier, and lenders right now are shunning risk.