Mortgage rates plummeted last week as week economic reports, chiefly jobs and unemployment reports came in at the weakest levels in several years.

The Freddie Mac Primary Mortgage Market Survey reported that the 30-year fixed-rate mortgage (FRM) dropped 20 basis points from the previous week to an average of 5.87 percent. Fees and points also moved down from 0.5 to 0.4 point. This was the lowest level the 30-year FRM had achieved since September 2005. One year ago the 30-year FRM averaged 6.21 percent.

The 15-year FRM for the week ended January 10 carried an average contract interest rate of 5.43 percent compared to 5.68 percent one week earlier. Fees and points dropped from 0.6 point to 0.4 point. During the same week one year earlier the 15-year FRM averaged 5.96 percent.

Five-year Treasury-indexed hybrid adjustable rate mortgages (ARMs) averaged 5.37 percent for the week, 10 basis points lower than the week before although fees and points remained firm at 0.5. During the same week in 2007 the 5-year hybrid was at 6.03 percent.

The one-year Treasury-indexed ARM averaged 5.37 percent with 0.4 point compared to one week earlier when it carried an average of 5.47 percent with 0.5 point and one year ago the one-year ARM averaged 5.44 percent.

Frank Nothaft, Freddie Mac vice president and chief economist said in a note accompanying the rate release, "The latest employment report showed that the economy added 18,000 jobs in December, the smallest gain since August 2003, and the unemployment rate jumped to a two-year high of 5 percent. In addition, the Institute for Supply Management's index of non-manufacturing business activity showed that the service sector had the slowest expansion in nine months during December. The National Association of Realtors also indicated a drop in its pending home sales index for November, signaling a possible slowdown in December sales. These weak economic reports renewed concerns about economic conditions in the near future. As a result, mortgage rates came down across the board, with 30-year fixed mortgage rates at their lowest level in more than two years.

"Because average mortgage rates have come down more than a quarter of a percentage point in the past two weeks, there has been a pickup in refinance activity as borrowers take advantage of the lower rates. For the first week of 2008, the Mortgage Bankers Association reported an increase in the refinance share of mortgage applications and the pace of overall applications, both at the highest levels in four weeks."

The current Weekly Mortgage Applications Survey (for the week ending January 11,) confirmed that the trend of higher mortgage applications is continuing. Volume was up 28.4 percent on a seasonally adjusted basis from the previous week and 64.8 percent when unadjusted. Applications were 39.0 percent higher than during the same week in 2007.

Refinancing accounted for a big part of the surge in applications. 62.7 percent of applications filed last week were for that purpose, up from 57.7 percent the previous week. As recently as November refinancing represented less than 50 percent of mortgage activity. Adjustable-rate mortgages, however, continue to decrease in popularity and now account for only 9.2 percent of activity.

The MBA survey picked up the same pattern of falling interest rates as Freddie Mac. The average contract interest rate for 30-year FRMs decreased to 5.62 percent from 5.73 percent, with points, including the origination fee decreasing to 0.94 from 1.10.

15-year FRMs decreased to 5.07 percent from 5.21 percent, with points decreasing to 1.09 from 1.18.

The average contract interest rate for one-year ARMs was down 27 basis points to 5.77 percent with points increasing to 1.00 from 0.99.