Mortgage rates fall as inflation fears subside

Mortgage rates decreased again this week after an array of economic reports suggested that inflation concerns had all but disappeared.

■ The benchmark 30-year fixed-rate mortgage fell to 4.18 percent from 4.27 percent last week, according to the Bankrate.com national survey of large lenders. One year ago, that rate was 4.39 percent. Four weeks ago, it was 4.27 percent. The mortgages in this week’s survey had an average total of 0.26 discount and origination points.

■ The benchmark 15-year fixed-rate mortgage fell to 3.37 percent from 3.44 percent.

■ The benchmark 5/1 adjustable-rate mortgage fell to 3.27 percent from 3.29 percent.

■ The benchmark 30-year fixed-rate jumbo fell to 4.21 percent from 4.29 percent.

“The biggest reason that rates are falling is we’re seeing more evidence that there is a lack of inflationary data,” Wells Fargo Advisors chief income strategist Brian Rehling says. “In fact, we’re seeing some deflationary data.”

What inflation?

The highly anticipated jobs report on Oct. 3 contained mostly good news. Employers added 248,000 new jobs in September, and estimates for July and August were revised upward. The unemployment rate also fell to 5.9 percent from 6.1 percent. However, wages remained stagnant, a key factor in keeping inflation low, Rehling says.

More proof of low to no inflation comes from commodity prices, especially oil prices, which are hovering at or under $90 a barrel, Rehling says. Oil prices drop when worldwide economic growth slows.

“Globally, there’s a difficult growth outlook,” he says.

When investors expect little to no inflation, assets with fixed payments such as Treasuries become more attractive because the value of those payments stays constant or decreases at a slow rate. As more people invest in Treasuries, the yields on those assets, which mortgage rates tend to track, fall.

Impact on mortgage market

Lower rates this week kicked up more interest from borrowers, according to a report released by the Mortgage Bankers Association on Oct. 8. The volume of mortgage applications increased 3.8 percent from the previous week. The number of refinances and purchase applications saw a rise.

Borrowing activity remains low. An Oct. 6 Black Knight Financial Services report found that the average mortgage age reached a record high of 54-plus months in August.

The older the average loan age, the fewer new loans there are. The report attributed the results to some borrowers being unable to qualify for mortgages, while others already have refinanced.

“We’re seeing very few refis to just refinance into a lower rate,” says Pava Leyrer, training and development manager at Northern Mortgage Services Inc. in Grand Rapids, Mich. “Instead, the refinances usually have a very specific reason.”

Particular refinances

For example, Leyrer has received several calls looking to consolidate debt through refinance. Others want to pay off a private mortgage, also called a land contract, which became popular in the Midwest a few years ago, Leyrer says. Another borrower wanted to do a cash-out refi to pay off the other stakeholders of an estate.

The one borrower who refinanced to get a lower rate chose a five-year adjustable loan with a 3.75 percent rate and did it before he switched to a commission-based job.

“Everyone doing a refinance is taking on longer terms rather than 15-year mortgages,” she says. “They’re nervous about a higher payment.”

Bernanke’s mortgage woes

One high-profile person who can’t qualify to refinance is none other than former Federal Reserve Chairman Ben Bernanke, who recently disclosed the conundrum at a conference in Chicago.

Bernanke oversaw the central bank’s unprecedented moves over the past several years to keep interest rates low to spur the economy. Unwinding those moves has been a specter hanging over mortgage rates this year.

The third round of the Fed’s asset purchases, known as quantitative easing, or QE3, is expected to end at the central bank’s late October meeting. So far, the reductions in purchases have not affected rates much. But rates could rise if the central bank signals when it will begin raising the federal funds rate, a benchmark for rates on consumer and business loans. Increases are expected to be gradual and steady.

“Rates have been this low so long, it has warped our perspective. We think if rates go to 5 percent or even 5.5 percent, it will kill the market,” says Joel Naroff, president of Naroff Economic Advisors based in Holland, Pa. “Even if we go up 100 basis points, we’re not talking about high rates, by any means.”