Mortgage-Rate Watchers Need Diet Of Tranquilizers

Attention mortgage-rate shoppers. You might need a tranquilizer before the rate jitters that began five weeks ago come to an end.

Just when rates started to bounce back up and nervous homebuyers rushed out to lock up - Zap! - some banks began cutting their rates all over again.

What's happening? Plenty, and it's all going on behind the scenes, in a world the average Joe and Jane never see. A lot of hidden factors are influencing how much it will cost you to finance a home.

Follow the bouncing ball carefully:

Mortgage rates slid for more than 2 1/2 years, hitting bottom at the start of this year. The average 30-year fixed-rate mortgage had plunged to 8.11 percent, the typical one-year adjustable-rate mortgage to 5.81 percent.

House hunters and refinancers were euphoric. It was a chance to slash thousands of dollars off their total mortgage tab and make monthly payments more affordable. Lots of people hung back, expecting even lower rates.

But during January, the 30-year loan rebounded by more than half a point. Here's why:

-- The Fear Factor. Rates were getting "too low," said lenders, especially those who remember getting burned the last time rates fell below 10 percent, in early 1987. By peddling cheaper mortgages then, they locked themselves out of higher rates - and profits - when rates suddenly turned upward. Many outfits went out of business. This time around, lenders became afraid of the idea of mortgages under 8 percent.

-- The Alan Greenspan Factor. He's the chairman of the Federal Reserve Board, the national oracle, the captain of the economic rudder. Everybody is a Greenspan-watcher. When he sneezes, the market catches pneumonia.

On Jan. 29, Greenspan testified before Congress, that there probably was no need to lower interest rates any further. It took Wall Street five minutes to digest that news, and mortgage investors started looking for higher yields.

Within 20 minutes of Greenspan's remarks, Norwest Mortgage Inc. in Des Moines, Iowa, adjusted its rates upward by at least one-eighth of a percentage point at 340 branches nationwide, reported David Boberg, vice-president of secondary markets.

Six days later, on Feb. 4, Greenspan did an about-face. Deeper rate cuts aren't out of the question, he said, if the economy remains in the doldrums.

Wall Street loved the news. The Dow Jones average rose to a record high, and yields on mortgage-backed securities fell. Banks and mortgage companies that only one day earlier had raised mortgage rates lowered them a notch.

The Mortgage-investor Factor. Banks and other lenders sell their mortgages to large investors who shop for yield. Those investors are constantly comparing what they can earn on mortgages with what they can get elsewhere, say on U.S. Treasury bonds.

It's a case of the tail wagging the dog: Borrowers don't influence mortgage rates, investors do. And it's up to lenders to make those investors happy.

"If we didn't increase rates after our competitors did," explained Boberg, "we'd be stuck with losses. We'd be attracting mortgages we couldn't sell (to the secondary market), because the investor is looking for a higher rate."

-- The Economic Factor. The national unemployment rate remained stuck at a five-year high of 7.1 percent in January, with 8.9 million people out of work, the government said Friday.

Lenders, investors and even the Fed watch that statistic closely. If unemployment drops, or the number of jobs increases, it's a sign the economy is getting stronger. Mortgage rates will rise because of more demand for credit.

Conversely, bad employment figures will mean lower mortgage rates.

Then there's President Bush's State of the Union address and the effect his economic rescue package would have on the staggering federal deficit. If it balloons even more, Uncle Sam would have to borrow more money by selling more Treasury bonds. That also would boost mortgage rates.

"There's greater volatility and uncertainty now over mortgage rates than ever," said Joe Suter, director of secondary marketing for PHH US Mortgage in Cherry Hill, N.J. "It's a crap shoot. Anybody who thinks he can predict where the rates are going would be better off taking his money to an Atlantic City casino."

The best advice, Suter added, "is to ask whether a mortgage deal makes sense for you now. If so, lock it up and sleep well at night."

Tranquilizer, Greenspan or casino. Take your pick.

Robert Heady's syndicated column appears Tuesdays in The Seattle Times. Heady is editor and publisher of four banking publications.