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Mortgage Holders See Hope In Fed Rate Cut

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The Associated Press

Published: January 25, 2008

NEW YORK - This week's surprise rate cut by the Federal Reserve not only held Wall Street and investors in thrall, it's also kicked into high gear a rush by homeowners across the country to refinance their mortgages at today's lower rates.

Thirty-year fixed-rate mortgages now carry an average interest rate of 5.57 percent, down from 5.75 percent last week and from 6.32 percent a year ago, according to a Bankrate.com national survey. That's bringing them within shouting distance of the historic low of 5.21 percent set in June 2003, when the housing sector was expanding quickly and there was a stampede of mortgage refinancings.

The Fed's unexpected reduction of the overnight bank lending rate by three-quarters of a point to 3.5 percent this week doesn't necessarily mean mortgage rates will drop by a similar amount. Mortgage lenders tend to peg their rates instead to the yield on the 1-year Treasury note or 3-month London Interbank Offered rates.

The Fed's action, however, was a response to worrisome economic and credit market developments that also have been pushing mortgage rates lower in recent months. And it seems to have set off a light bulb above the heads of many homeowners.

In general, a mortgage is deemed "refinanceable" if it is 0.40 percentage point above current average mortgage rates. The recent drops in mortgage rates have made up to 7 million mortgages, or more than 70 percent, eligible for refinancing, according to Tony Crescenzi, a fixed-income analyst at Miller Tabak.

The Mortgage Bankers Association said refinancings last week reached their highest levels since April 2004.

David Motley, president of Fort Worth-based Colonial National Mortgage, which originates loans in all 50 states, is expecting applications to surge higher.

"For the last six to eight months all people have heard about is the subprime crunch," he said. "There is an incorrect impression that because of the subprime mess regular people can't get a loan or a refinancing right now."

The rush to refinance could get a further boost from the government's tentative economic stimulus package. The package would allow government-sponsored Fannie Mae and Freddie Mac to buy mortgages worth as much as $729,750, up from a prior cap of $417,000.

Motley noted that mortgage rates were attractive before the Fed action, but "the Fed move got everyone's attention and people are now looking at rates again."

Even so, experts say securing refinancings at terms they want may prove difficult for owners whose homes have slumped in value.

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