WEST PALM BEACH, Fla. – New record low fixed-rate mortgages have become a weekly event. Most recently, fixed-rate mortgages hit yet another new low the week of August 13 – the average for the 30-year fixed-rate mortgage declined to an average 6.22% from 6.31 the week before, and the 15-year fixed-rate mortgage was 5.63%, down from the previous week's average of 5.69%, according to surveys conducted by Freddie Mac and Bankrate. Logically, say credit union trade association economists, the downslide can't continue indefinitely. But how much lower can CUs afford mortgage rates to go? NAFCU Economist Jeff Taylor and CUNA Economist Steven Rick agree 30-year fixed-rate mortgages "are getting close to the bottom." Taylor noted that 30-year mortgage rates are priced off of the 10-year Treasury note, and "they've had their run," he said. Both Taylor and Rick blamed the downslide in 30-year mortgage rates on consumers' continued mistrust of the still-shaky stock market and the corporate Enron-like scandals. Although the stock market is slowly recuperating, there's still a lot of uncertainty among consumers. That environment is continuing to force many of them to move their money from equity funds into bonds, and that in turn has been driving 10-year Treasury-note prices up, their rates down, and consequently mortgage rates down. In fact, said Rick, the rate on the 10-year Treasury fell below 4.0% for the first time ever the week of August 12, to 3.96. "As long as people keep taking their money out of the stock market and buy bonds, mortgage rates will continue to fall" he said. The challenge to credit unions in this type of rate environment, said Taylor, is for them to be able to price their loans and reduce dividends in line with what the interest rates and cost of funds. Credit unions' 30-year fixed mortgage rates, he said, are still very competitive with other financials' rates, and credit unions have been able to maintain their margins because their interest expenses fell more than their interest income. But for the time being at least, credit unions will continue to do business in a low interest rate environment, and Rick said he's already seeing the toll that's taking on the rates credit unions offer on regular savings and CDs. In May 2001, for example, the national average interest rate on share accounts was 2.85%, and in May 2002 that had dropped to 1.75%. Similarly, one-year CD rates offered by CUs nationally in May 2002 were 2.8%. A year earlier they were 4.6%. "Interest rates will turn when the stock market turns and consumers move money out of the bond market and back in to stocks," said Rick. When will that be? Taylor said he doesn't expect mortgage rates will go up much even in 2003, and he predicts they'll stay in the 6.5 range for at least the first half of 2003. "The determining factor is consumer uncertainty," said Rick. "Right now there's too much of it. When that's been reduced, then interest rates will start to increase." In the meantime, Taylor said credit unions need to look at their mortgage portfolios and commit to selling off some of their fixed-rate mortgages on the secondary market. Otherwise, he said, "they'll have to face the consequences of holding on to so many fixed-rate mortgages when interest rates start to go up." He estimated about 70% of credit unions' mortgages are fixed-rate. "A lot of credit unions are new to the mortgage market. They don't have a lot of volume yet, nor do they have a relationship with Freddie Mac or Fannie Mae. Credit unions also have tended to shy away from selling mortgages on the secondary market because some of them see it as giving up their relationship with their members. That's not true, and they need to get over that or they'll have problems down the road," said Taylor. -

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