Tumultuous global financial markets last week sent U.S. mortgage rates reeling on a raucous roller coaster ride experts say should begin to smooth out this week with a day off to give some financial markets a breather.

Last week began with mortgage interest rates at record levels unheard of for three decades, but by week's end the 6.5 percent average was up by more than half a point to about 7 percent.

With mortgage applications up more than 150 percent compared to last year, according the Washington, D.C.-based Mortgage Bankers Association of America, the precipitous events unfolded at an unfortunate time killing many pending loans or forcing consumers to pay more than anticipated.

Woeful World Economy to Blame

Whipsawing stock, bond and currency prices worldwide get the blame for mortgage market turmoil. The Japanese market turned bullish a bit sending Asian investors fleeing the bond market. The U.S. dollar weakening against the yen didn't help, said Warren Myer, CEO of San Jose, Calif.-based Mortgage-Net.

"There is a major asset allocation shift underway, but it's not from equities into bonds, as had been the case over the past few weeks. Instead, it's from long term U.S. Treasuries into the shortest term U.S. Treasuries," Myer said.

"It's roughly similar to taking your money out of a one dollar per share money market mutual fund, and putting it in the bank to get FDIC insurance protection. They are worried that some big American banks could go bankrupt," he added.

Which Way Rates Now?

Economists say with a withering U.S. economy, Asia's already in recession and the Federal Reserve Board apparently contemplating a further cut in the short-term interest rate it controls, it is unlikely that mortgage rates will rise much further.

"I don't see it continuing. It's mind-boggling," said David Lereah, chief economist of the mortgage bankers' association.

HSH Associates of Butler, N.J. believes rates have more room to rise before settling by the end of the week.

"Mortgage rates will rise sharply by (Oct. 16). We expect to see the 30-year fixed rate rise from this week, but fall short of Friday's 7.04 percent average. Call it 6.95 percent for the average next week, as a bit of stability returns," HSH reported Oct. 9.

Not Everyone Agrees.

The mortgage benchmark bond market is closed in observance of the Columbus Day holiday Oct. 12 and that will help stabilize Treasury yields, but rates could still move according to Bill Steele, financial editor of Mortgage Market Information Services.

"If events overseas and financial market conditions are deemed unfriendly to Treasury securities, lenders may raise their mortgage rates in anticipation of Treasury securities movement on (Oct. 13)," when the market reopens, Steele said in his Oct. 9 report.

Some Consumers Locked Out

As the economy continues to jostle the market, lenders are edgy and unlikely to honor verbal interest interest rate agreements, forcing borrowers still in the application doldrums to weather the storm.

"If you don't have a rate lock, you are S.O.L.," said Earl Peattie, president of Morro Bay, Calif.-based Mortgage News Co.

Published: October 12, 1998

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