U.S. mortgage rates dropped in the latest week, retreating sharply from a seven-month high as fears over inflation abated and Treasury yields dropped.

Interest rates on U.S. 30-year fixed-rate mortgages plunged to 5.38 percent for the week ending June 18, according to a survey released on Thursday by home funding company Freddie Mac.

That was down from the previous week's 5.59 percent, which was the highest level since the week of November 26, 2008.

Seven weeks earlier, the 30-year fixed-rate mortgage equaled the record low of 4.78 percent that was set the week ending April 2, which was the lowest since Freddie Mac started the Primary Mortgage Market Survey in 1971.

Bob Walters, chief economist at Quicken Loans, an online mortgage lender in Livonia, Michigan, said for the last several months, activity has been driven by historically low rates.

Last week signaled an abrupt departure from the low rates we have seen since November, spooking many consumers, he said.

The drop in rates this week should help many consumers breathe a little easier, he said.

The U.S. government has embarked on an aggressive plan to bring mortgage rates down to levels that will spur demand and help the hard-hit housing market begin to recover.

Thirty-year mortgage rates had mostly been on a downward trend since the Fed unveiled its plan to buy mortgage-backed debt in late November.

The Federal Reserve has set a goal to buy up to $1.25 trillion of agency MBS, $300 billion of Treasuries and $200 billion of agency debt in 2009. The purchases are part of efforts to lower borrowing costs.

The hope is that the Fed can keep rates low long enough to kick-start a housing recovery, Walters said.

Whether that will work remains to be seen, he said.


Treasury yields, which are linked to mortgage rates, rose sharply earlier this month as their prices plunged when inflation fears eroded their appeal, and mortgage rates responded in kind.

Treasury yields, however, have come down recently, allowing rates to fall.

Reports of benign inflation figures reversed the upward trend of mortgage rates this week, Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

The battered U.S. housing market, which is in the midst of its worst downturn since the Great Depression, is both the source and a major casualty of the credit crisis. A setback for the market could prolong a turnaround for the United States, the world's largest economy.

Low interest rates on mortgages are considered to be pivotal for the U.S. housing market this spring, the peak home buying season.

Low mortgage rates had been spurring demand for home refinancing loans, but that has dropped off sharply. Lower monthly payments provide a bit of relief to strapped consumers amid rising unemployment and a shrinking economy.

However, even when rates were lower, it had little to no impact on demand for loans to purchase homes. The Fed had hoped lower interest rates on mortgages would change that.


Freddie Mac said the 15-year fixed-rate mortgage averaged 4.89 percent in the latest week, down from 5.06 percent the previous week.

One-year adjustable-rate mortgages, or ARMs, fell to an average of 4.95 percent from 5.04 percent last week. Freddie Mac said the 5/1 ARM, set at a fixed rate for five years and adjustable each following year, averaged 4.97 percent, compared with 5.17 percent a week earlier.

A year ago, 30-year mortgage rates averaged 6.42 percent, 15-year mortgages were at 6.02 percent and the one-year ARM was at 5.19 percent. A year ago, the 5/1 ARM averaged 5.89 percent.

Lenders charged an average of 0.7 percent in fees and points on 30-year mortgages, unchanged from the previous week, while they charged an average 0.7 percent in fees and points on 15-year mortgages, unchanged from the previous week.

The 5/1 ARM fees and points were 0.6 percent, unchanged from the previous week. The one-year ARM fees and points were 0.6 percent, down from 0.7 percent the previous week.

Freddie Mac and its larger sibling, Fannie Mae, were placed under government conservatorship in early September.

Freddie Mac is a mortgage finance company chartered by Congress that buys mortgages from lenders and packages them into securities to sell to investors or to hold in its own portfolio.