March 19 (Bloomberg) -- U.S. mortgage rates may fall to the lowest since World War II on the Federal Reserve’s plan to buy up to $300 billion of Treasuries and increase purchases of mortgage-backed bonds.

Rates for 30-year fixed home loans dropped to 4.98 percent this week, Freddie Mac said today. They may reach 4.5 percent as the Fed’s purchases progress, said Mike Larson, real estate analyst at Weiss Research in Jupiter, Florida.

“It’s a big bullet the Fed’s firing here,” he said. “The Fed is kind of going all in.”

U.S. central bankers said yesterday they will buy up to an additional $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae to support home lending. The Fed is trying to lower rates by reducing the supply of outstanding mortgage bonds, boosting their price and lowering yields. That would allow banks to reduce the rates on new mortgages and still sell mortgage securities at a profit.

The Fed announced a program in November to buy $500 billion of mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie Mae. That helped drive 30-year fixed mortgage rates down to 4.96 percent during the week ended Jan. 15, the lowest since Freddie Mac began keeping track in 1971.

In 1945, the average mortgage rate was 4.7 percent, Larson said, citing the book, “A History of Interest Rates,” published by Rutgers University Press.

The Fed’s plan to buy additional mortgage bonds would increase its purchasing commitment to as much as $1.25 trillion.

The 15-year rate averaged 4.61 percent, the lowest since 2003, Freddie Mac said. Last week the rate was 4.64 percent.

‘Greater Support’

Yesterday’s decision was intended “to provide greater support to mortgage lending and housing markets,” the Federal Open Market Committee said in a statement in Washington.

Mortgage applications in the U.S. increased last week as lower borrowing costs led to a surge in refinancing. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan rose 21 percent to 876.9 in the week ended March 13, the highest in two months, from 723.4 the prior week. The group’s refinancing gauge jumped 30 percent and its purchase index gained 1.5 percent.

The mortgage bankers’ purchase index increased to 257.1 last week from 253.3 a week earlier. The index reached an eight- year low of 235.9 in the first week of February. The refinancing gauge rose to 4497.6, the highest in two months, from 3470.7.

Wider Spreads

While the Fed’s actions have helped bring down mortgage rates, those costs have remained elevated relative to benchmark Treasuries. Prior to yesterday’s announcement, the difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.1 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.

Lower mortgage rates by themselves also may not be enough to spark demand for home purchases.

For consumers who’ve lost their jobs or are worried about losing their jobs, low mortgage rates won’t be enough to prompt them to commit to buying a house, Larson said.

Slumping stock prices, record home-loan defaults, falling property values and job losses have cut demand for new and existing U.S. homes. Consumers are also having difficulty obtaining mortgages as banks tighten lending standards.

The U.S. jobless rate rose to 8.1 percent in February as employers reduced payrolls by 651,000, according to the Labor Department.

Mortgage delinquencies increased to a seasonally adjusted 7.88 percent of all loans in the fourth quarter, the highest in records going back to 1972, the Mortgage Bankers Association said March 5. Loans in foreclosure rose to 3.30 percent, also an all-time high.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

Last Updated: March 19, 2009 15:14 EDT