Interest Rate Risk Comes on the Radar Screen Again

As mortgage lenders started reporting second-quarter results last month, most were poised to see positive servicing results as long as they didn't overhedge their asset. Long-term interest rates ended the quarter a tad higher than they were at the start. According to Freddie Mac, the average 30-year mortgage rate on conforming loans was 6.67% on June 28, compared with 6.16% on March 29.

But like clouds looming over Wimbledon just as a tennis match is about to get underway, the threat of another refinancing storm just keeps popping up on the radar screen.

Witness the movement in rates during mid-July was downward, with the average 30-year fixed-rate home loan carrying a rate of 6.63% in the week of July 4, down three basis points from a week earlier. It was the third week in a row that rates had declined. The 30-year average was also lower than it had been a year earlier.

Frank Nothaft, chief economist at Freddie Mac, said that moderation in core inflation numbers was a key factor pushing rates down in recent weeks. That has somewhat eased concern that the Federal Reserve Board would resume an upward move in short-term interest rates. But don't bet that the Fed will move rates down anytime soon.

"In the statement accompanying their decision to leave the target federal funds rate unchanged, the Fed noted that core inflation had declined recently, though a sustained moderation is still to be seen, and signaled that inflation risk continues to figure prominently in their policy decisions."

Looking at the weighted average coupon of some of the nation's largest lenders suggests they are not likely to see a big spate of portfolio churning. Washington Mutual, for instance, had a weighted average note rate of 6.45% on its prime mortgage portfolio at the end of the first quarter. While that's up from the end of 2006, it still doesn't look too "cuspy" in today's environment.

But with many subprime, option-ARM and hybrid loans set to adjust upward, refinancing there still is a fair amount of rate incentive for borrowers to refinance.

Already, evidence is mounting that the "run rate" on refinancing has edged up over time. Thirty-eight percent of home loan applications were for a refinancing transaction in the first week of July, according to the Mortgage Bankers Association. While that's nowhere near a refi "boom," it isn't as low as you might expect in the wake of a multiyear refinancing wave that progressively brought mortgage rates on outstanding loans lower and lower.

And with rates trending downward in the early weeks of July, servicing management was reminded that interest rate risk should never fall off the radar screen. But at least for the moment, servicing values seemed fairly safe. Just as MSN went to press in early July, bonds fell and rates were once again edging upward. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com