U.S. Banks Offer Mortgage Rates Below 5% as Fed Buys Securities

By Dan Levy

Jan. 8 (Bloomberg) -- The largest U.S. banks are starting to offer fixed home loans below 5 percent after the government began buying mortgage securities to bolster the housing market.

JPMorgan Chase & Co. is advertising 30-year mortgages as low as 4.75 percent on its Web site, Wells Fargo & Co. has an offer for 4.875 percent and Bank of America Corp. has rates at 5 percent. The offers are for borrowers with excellent credit who put 20 percent down.

The Federal Reserve earlier this week began purchasing $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae to help lower mortgage costs. While the lower rates may lead more borrowers to refinance, it may not spur home buying in the second year of the recession after more than 2 million jobs were lost in 2008.

“I don’t know if there is a magic number now that everyone is freaking out about the economy,” said Paul Miller, a mortgage industry analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. “The home buyer is scared out of the market.”

Freddie Mac is expected to report 30-year fixed mortgage rates today. The fixed rate dropped to 5.10 percent, the lowest on record, last week from 5.14 percent a week earlier, the McLean, Virginia-based mortgage finance company said on Dec. 31.

Lower Yields

The Fed’s purchase program, which also includes buying $100 billion in direct debt, is intended to lower consumer rates by reducing the supply of agency mortgage bonds issued by Fannie, Freddie and Ginnie. That would boost their prices and lower yields, in turn reducing the interest rates banks charge on new mortgages to ensure sales of the securities are profitable. Agency bonds now facilitate almost all new home lending.

Jill Pfeiffer, a mortgage broker in San Diego, this week obtained a 4.875 percent rate on a 30-year fixed loan for a homebuyer with a credit score above 750, she said in an interview.

“It’s the lowest I’ve ever locked in on a 30-year fixed” since she began her business in 1996, she said.

The loan, with Sun Trust Mortgage Inc., had no origination fee or points, a percentage of the loan amount that lenders charge, Pfeiffer said. At least two other lenders could have matched the rate, she said. She also had four inquiries from homeowners looking to refinance mortgages.

Prices Declining

Rates are dropping as home prices in 20 major U.S. cities declined 18 percent in the year through October, the fastest rate on record, as tighter lending standards curbed sales and foreclosure sales pushed down values.

Sales of single-family homes declined 7.6 percent in November from the prior month, the most in two decades, according to the Chicago-based National Association of Realtors. Resale prices fell 13 percent, the most since the Great Depression in the 1930s.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped to 1,143.8 for the week ending Jan. 2, from a five-year high of 1,245.7 the prior week, as consumers held out for lower rates. The group’s purchase gauge rose 7.3 percent and the refinancing measure decreased 12 percent.

Applications for home-loan refinancing and new purchases may increase as rates drop below 5 percent and exceed the five-year high of two weeks ago, Jay Brinkmann, chief economist for the Washington-based Mortgage Bankers group, said in an interview.

Lower Rents

“We would expect that activity to continue,” Brinkmann said of increased mortgage applications.

Lower rates may not encourage some buyers because U.S. apartment rents are falling and landlords are offering concessions such as free rent to avoid higher vacancies.

Apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent, Reis Inc. said yesterday in a report.

Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter.

“Even if rates go low enough, if you got married, you’re 28 years old with no kids -- the typical first time buyer --you’ll wait a year and continue to rent because there are good deals out there,” said Miller, the mortgage analyst.

At HomeStreet Bank in Seattle, consumers were being offered a 30-year fixed mortgage rate of 4.75 percent this week, according to Rich Bennion, vice president of residential lending. Flagstar Bank in Troy, Michigan, had rates below 5 percent that may include some costs to customers, spokeswoman Susan Cherry said.

“This is the lowest that I’ve seen,” Bennion said.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net.