Record low mortgage rates toss housing a lifeline

By Lynn Adler

NEW YORK (Reuters) - With the $500 of monthly savings Jim Hennessy of San Diego gained by cutting the rate on his $417,000 mortgage, he plans to rebuild his beaten-up retirement account and maybe even take a cruise.

This is the outcome the U.S. government was driving at when it said it would pump hundreds of billions of dollars into buying mortgage bonds, freeing up lenders to make new loans and lower-rate refinancings that spur consumer spending and the economy.

"Maybe there's a vacation in our future, maybe a cruise because those rates have come down so much," said Hennessy, managing director of a marketing firm.

The worst housing slump since the Great Depression has crippled top international banks and has tipped the world's biggest economies into recession.

Hennessy cut his mortgage rate by a full percentage point by refinancing 11 days ago into a 5-1/2 percent 30-year loan.

That will help to pay college tuition for his children, and "we'll probably put more into savings and try to have some semblance of a retirement," he said.

Hennessy is just one example of borrowers aiming to reduce their home loan payments or buy a home as a result of government actions to push mortgage rates to new lows.

The average 30-year U.S. mortgage fell more than 1/4 point in the week ended December 18, to 5.19 percent, the lowest since Freddie Mac started its weekly survey 37 years ago.

It was the seventh straight weekly decline and brought rates down from about 6-1/2 percent in October.

The decline was also the result of the Federal Reserve cutting its benchmark federal funds rate target to a record low this week.

"Being baby boomers, we're looking down the road at retirement, and are making every effort to be as debt free as possible," Hennessy said.

Deep stock market losses and two years of home price declines have shredded wealth for many homeowners who may be able to restore some of their losses with cheaper borrowing.

Rodney Anderson, managing partner of Rodney Anderson Lending Services, a unit of Supreme Lending, in Plano, Texas, said mortgage applications are starting to flood in.

"We're seeing pre-approvals in the amount comparable to 2003, and July 2003 was my biggest month ever in mortgage history," he said. "I closed 287 loans that month and we're already seeing closings occurring in December and our January pipelines are just starting to launch."

Swapping high-rate home loans for more affordable mortgages is driving most of the demand, but purchases are also starting to revive, he said.