Mortgage rates fall, 1st time since February

Fed actions spur drop in 30-year fixed-rate mortgages, but ARM rates still climb.

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By Tami Luhby, senior writer

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NEW YORK ( -- Borrowers looking for fixed-rate mortgages can now find the lowest rates in more than a month. But experts warn the decline may not last for long.

Rates on fixed-rate mortgages dropped sharply in the past week, after the Federal Reserve took several historic steps to shore up the financial markets. The rate on a 30-year loan dropped to an average of 5.87%, down from 6.13% a week ago, according to new Freddie Mac figures released Thursday. A 15-year mortgage now can be had for 5.27%, down from 5.60%

Mortgage rates had been climbing since mid-February as investors turned away from securities backed by traditional loans issued by Fannie Mae and Freddie Mac. This market had remained fairly stable throughout the mortgage meltdown, which started last summer and made it much tougher and more expensive to get subprime and jumbo mortgages.

But even traditional mortgages became costlier after investors started to question the value of these agency securities when Fannie and Freddie reported a combined $6 billion in losses last month. Then, financial fund Carlyle Capital announced its lenders wanted more money to make up for the depressed value of the agency mortgage-backed securities Carlyle had put up as collateral for loans.

In the past week, the Federal Reserve worked to calm the markets by taking a series of steps, including allowing investment banks to borrow funds and put up mortgage-backed securities as collateral. Also, it backed JPMorgan Chase's fire-sale purchase of Bear Stearns and cut the interest rate by three-quarters of a point. Finally, regulators enabled Fannie and Freddie to invest more in mortgages by lowering the amount of capital they have to hold as a reserve against potential losses.

Still, rates are much higher than they should be based on the interest rate of the 10-year Treasury, which generally serves as a benchmark for mortgage rates, said Greg McBride, senior financial analyst at Rates on home loans usually average about 1.8 percentage points above the Treasury, which should translate into 5.25% mortgage rates. But continued anxiety in the markets are pushing the spread higher.

Rates on adjustable-rate mortgages, however, continue to climb, averaging 6.44%, up from 6.21% last week, according to That's because these loans have higher default and delinquency rates so investors continue to demand a premium, said McBride.

"Between institutions unloading existing bonds and the lack of appetite for new securities, the rates have climbed in an effort to attract investors," he said.

But it's too early to tell what will happen to rates in coming weeks, experts said. It will take time, possibly months, for the Fed's moves to soothe the markets long-term. Another round of bad news could easily spook mortgage-backed security investors again, experts said.

"Every time we think we see a trend, it seems to reverse itself," said Gregory Heym, chief economist with Terra Holdings, parent company of two of Manhattan's largest real estate brokerage companies.

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