(Corrects number of years for historic low in first paragraph) (Recasts lead; adds money manager, Chase comments)
By Al Yoon
NEW YORK, Jan 8 (Reuters) - The average interest rate on 30-year U.S. fixed-rate mortgages dropped to a 38-year low of 5.01 percent in the latest week, after the Federal Reserve launched its mammoth plan to lower home borrowing costs, Freddie Mac said on Thursday.
The rate for the week ended Thursday declined from 5.1 percent in the prior week and marked the 10th consecutive week of declines. It was the lowest rate recorded by Freddie Mac, the second-largest provider of funding for residential mortgages, since its survey began in 1971.
The Fed this week began its purchases of up to $500 billion in mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae, resulting in sharply lower yields on the bonds that influence the rates that lenders can offer consumers.
Mortgage rates began to fall after the Fed announced its plans to buy mortgage-backed securities in November, and should continue to drop since the bond rally is extending, albeit at a slower rate, analysts said.
“The U.S. government has decided that lower mortgage rates are what they want, and so they will drive them lower,” said Jason Brady, a bond manager at Santa Fe, New Mexico-based Thornburg Investment Management, which invests $35 billion.
Mortgage rates have declined nearly 1.5 percentage points since October, creating a savings of about $184 per month on a $200,000 loan, Frank Nothaft, chief economist at McLean, Virginia-based Freddie Mac, said in a statement.
The Fed’s move is seen as one of the most promising federal efforts to stabilize the housing market, which is in its worst downturn since the 1930s and exacerbating a recession. Still, analysts say it is not a cure-all, since tighter lending standards will prevent many borrowers from refinancing high-cost loans.
Rates below 5 percent are available for the best customers of JPMorgan Chase & Co’s (JPM.N) Chase Home Lending, helping to fuel a three-fold increase in refinancing applications since November, said Thomas Kelly, a bank spokesman in Chicago. Those customers have high credit scores and hold at least a 20 percent equity stake in the home, he said.
Chase saw refinancing applications jump after the Fed announced its bond purchase plan and again as the central bank cut its key federal funds short-term interest rate target to zero to 0.25 percent, he said.
What is not clear is how many of those applications will be approved, since appraisals may find the homes are worth less than the borrowers thought, he said. Borrowers’ credit ratings may have also weakened, he said.
Home prices continued a more than two-year drop in October as borrowers with risky mortgages written during the housing boom face foreclosure, which puts further pressure on home values. Prices nationwide have fallen nearly 20 percent in the year through October, and more than 30 percent in the metropolitan areas of Phoenix, Las Vegas and San Francisco, according to Standard & Poor’s Case-Shiller indexes.
Job loss could also hurt refinancing ability. The government on Friday will likely report U.S. unemployment rose to 7 percent in December, which would be the highest rate since 1993. (Editing by Leslie Adler)