Mortgage rates fell to their lowest levels in more than two years as financial markets took it on faith that the Federal Reserve will cut short-term rates next week, according to a survey by Freddie Mac (FRE) .

 

The average interest rate on benchmark, 30-year fixed-rate mortgages was 5.96% in the week ended Thursday, down 14 basis points from 6.1% the previous week and 15 basis points from 6.11% a year ago. A basis point is a hundredth of a percentage point.

 

Freddie says the 30-year fixed-rate mortgage has not been lower since the week ended Sept. 29, 2005, when it averaged 5.91%.

 

 

The housing market was very different then: Prices were peaking and the Fed was raising rates. Now home prices have weakened as millions who took out adjustable-rate mortgages with low, initial rates are unable to make payments once they reset. As a result, "for sale" signs are popping up in neighborhoods across the country.

 

And instead of raising interest rates, the Fed is now cutting them. It's expected to do so again at its next policy meeting Tuesday.

 

Freddie Mac is chartered by Congress to buy mortgages from lenders, freeing them to make more loans. Its weekly survey is based on first-lien loans to borrowers with good credit. The loans are no bigger than $417,000 for no more than 80% of the value of property.

 

The survey doesn't speak to rates on subprime mortgages, or loans to people with less-than-stellar credit. These have remained stubbornly high as more subprime borrowers default. On Thursday, the Bush Administration outlined a plan to help some struggling homeowners by freezing rates at their low, introductory levels.

 

Interest rates on 30-year mortgages tend to move in line with yields on 10-year Treasuries, as 10 years is the average life span of these loans. Most borrowers sell their homes or refinance within that time.

 

Frank Nothaft, Freddie Mac vice president and chief economist, noted in a press release that Treasury yields have fallen on the back of data indicating that consumer spending and personal income gains fell in October, pulling mortgage rates down with them.

 

He cited other economic data, such as rising non-farm productivity and falling labor costs, that have given the Federal Reserve more leeway to reduce short-term interest rates next week, diminishing upward pressures on mortgage rates over the next few months.

 

The 15-year fixed-rate mortgage averaged 5.65%, down from 5.73% last week and 5.84% a year ago. The 15-year fixed-rate mortgage has not been lower since the week ended Oct. 13, 2005, when it averaged 5.62%.

 

Rates on five-year, Treasury-indexed hybrid adjustable-rate mortgages, or ARMs, averaged 5.75%, down from 5.86% last week and 5.92% a year ago. The five-year ARM has not been lower since the week ended Oct. 27, 2005 when it averaged 5.63%.

 

One-year Treasury-indexed ARMs averaged 5.46% this week with an average 0.6 point, up from last week when it was 5.43%. At this time last year, the one-year ARM averaged 5.43%.

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