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SURGING BOND MARKET COULD PUSH MORTGAGE RATES BELOW 7%

The good news is money might become even less expensive to borrow.

Tumbling stock prices here and abroad, which have lured investors into the U.S. bond market, could push already low interest rates down even further, according to economists and bankers.

Thirty-year mortgage rates will probably begin inching down, and some local lenders predict rates could be as low as 6.5 percent this fall.

"I think that within a week to two weeks, you might see 6 7/8 or 6 3/4 percent. We don't see rates going more than one-half a percent lower than they are now," said David J. Hunter, executive vice president of Marine Midland Mortgage Corp., which is offering 30-year loans at 7 percent.

A senior economist for Chase Manhattan Bank believes interest rates could be "sharply lower" over the fall and winter.

But some lenders caution customers not to be distracted playing the market waiting for lower rates.

"If you've got a good deal, take it. Don't try to squeeze another one-eighth to one-quarter percent out of it," said Gary Hutchings, administrative vice president for M&T Mortgage Corp. "If you can get a rate near 7 percent, I'd be glad for it and lock it up."

The low rates are making home ownership more affordable for many area residents. A one-half percent interest rate reduction saves the borrower about $35 a month on a $100,000 loan.

Heavy demand on the bond market is driving interest yields down. Investors seeking refuge from free falling stock prices on the U.S. and global markets are pouring money into U.S. Treasuries.

When bond prices go up, interest yields go down. Mortgage rates typically move in step with Treasury yields.

After Tuesday's stock market carnage, the 30-year Treasury yield slid to 5.34 percent. That puts 30-year yield under the Federal Reserve's federal funds rate of 5.5 percent, which is the rate banks charge each other for overnight loans. That has creating the rare situation known as an inverted yield curve, where short-term rates are actually lower than long-term yields.

The yield curve could induce the Federal Reserve to drop the overnight rate.

"When you have overnight money yielding more than 30 year money,
that won't last for long," said Marc M. Goloven, senior regional economist for Chase Manhattan Bank.

Freddie Mac chief economist Robert Van Order believes average national mortgage rates will drop slightly next week. But Van Order does not see a significant drop coming.

"I don't know that we'll be seeing rates go a whole lot lower," Van Order said. "A lot of what we're seeing, with people pouring their money into Treasuries, could be temporary."

Average mortgage rates are already at record low levels. Rates have not been this low, for this long, since Freddie Mac began surveying the market in 1971. Freddie Mac said Thursday the national average for a 30-year, fixed rate mortgage was 6.92 percent, with fees and points averaging 1.1 percent of the loan amount.

Although bond yields have been sinking steadily this summer, local mortgage rates have held in the 7 to 7 1/4 percent range. The market conditions have allowed banks to loan money at a more profitable spread.

"The rates really should be lower than they are now already. Everybody in this business knows that. They really have been artificially inflated," said Michael S. Bonito, president of MultiSource Funding, Inc., a local mortgage brokerage working with about 60 different lenders.

Robert J. Amico, Western New York sales manager for Fleet Mortgage Corp., said he thinks heavy demand for money has contributed to the larger spreads. Western New Yorkers have flooded into bank offices this year to refinance mortgages and local home sales are 13 percent higher than last year.

"It's a market driven situation. If you've got a lot of loans coming in the door at seven and a quarter, does it make sense to drop the rate to seven percent and take a smaller yield," Amico said.

Local refinance activity has cooled. Two of every three applicants in January at the Buffalo branch of Norwest Mortgage were seeking to refinance. Now two of every three customers in the door are seeking purchase money.

"We're seeing a larger percentage of purchase interest than refinance interest. People are moving up to new homes or buying a second, vacation home," said John Rossi, Norwest's Buffalo branch sales manager.

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