Mortgage rates fall slightly as lenders grapple with worsening problems

The housing economy was buffeted by contradictory news this week, while mortgage rates fell for the first time in a month.

The benchmark 30-year fixed-rate mortgage fell 7 basis points, to 6.75 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 0.29 discount and origination points. One year ago, the mortgage index was 6.77 percent; four weeks ago, it was 6.74 percent.

The benchmark 15-year fixed-rate mortgage fell 8 basis points, to 6.42 percent. The benchmark 5/1 adjustable-rate mortgage fell 15 basis points, to 6.41 percent.

The week's big headline came courtesy of Angelo Mozilo, CEO of Countrywide Home Loans, the nation's largest mortgage lender. He told analysts that home prices have been falling at a rate not seen since the Great Depression, and he predicted that home sales and prices won't rise until 2009. Countrywide announced that its second-quarter profits plunged compared to the same period a year earlier.

"During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result," Mozilo said.

Of the subprime mortgages that Countrywide services, almost one-quarter were at least 30 days past due at the end of June, up from 15 percent a year earlier. The default rate on prime mortgages went up from 2.05 percent to 3.35 percent. Housing bears took this as a sign that the troubles with subprime mortgages were beginning to spread to prime loans.

The National Association of Realtors told a slightly less depressing story a day later, when it announced that sales of existing homes fell 13.6 percent in June compared to the previous June -- from 699,000 to 604,000 units. That's rotten news for home sellers, especially considering that there's an 8.8-month supply of houses on the market -- definitely a buyer's market.

But if prices are any indication, the buyer's market hasn't quite arrived. Half the houses resold in June cost more than $230,100, or 0.3 percent above the median price a year before of $229,300. Economist Joel Naroff called prices "surprisingly firm" and added: "While some may say the stability in prices is an indication that the bottom may be near, I say it is the major problem facing the market. With inventories so high and sales so weak, unless people start pulling homes off the market, the overhang will remain."

Naroff predicts price declines in many areas, especially as subprime borrowers lose their homes to foreclosure and their houses get dumped onto the market.

The Federal Reserve got into the act with the release of its Beige Book, a periodic economic snapshot of the Fed's 12 regions. It said home sales rose in the Cleveland and Richmond regions, but in the rest of the country, housing markets didn't look good. Mortgage activity fell in almost all districts as home sales fell and interest rates rose.