Housing and Interest Rates

The news is abuzz about the Treasury lowering home loan rates to 4.5% to stem the foreclosure crisis, but details have been lacking. The Treasury Department stated it is looking for additional ways to help the struggling housing industry and believes lower rates are needed. This idea is similar to last week’s announcement from the Federal Reserve of their to purchase up to $500 billion in mortgage-backed securities. Mortgage rates fell almost 1/2% in rate following the announcement. However, rates crept up slighlty Friday from their lows.

It is important to remember that there are no details to the Treasury plan as of yet. The Federal Government does not directly dictate home loan rates. Rates are determined by price movements of Mortgage Backed Securities (MBS), which compete for investor funds in the open market. The Treasury can buy mortgage bonds on the open market but they are not the only entity buying and selling these instruments.

The Treasury is in a very tough position in trying to manipulate home loan rates. Creating a new Federal mortgage program could be very risky. How would rates be set, who would qualify, and whether the funds would be used for purchases and refinances are just some of the questions being asked. The other critical concern is implementing such a program without destroying the current mortgage securities market. Doing so could have the unintended consequence of causing additional economic turmoil.

Rates are not going to 4.5% with the wave of a wand by Hank Paulson or Ben Bernanke. At this time, the announcement still leaves a lot of uncertainty. What we do know is that rates are at historic lows and house prices have moderated setting up a great scenario for people who need to refinance or are looking to buy a home. Waiting for rates to fall to 4.5% may leave people disappointed.

2 Responses

  1. Digging the new blog header!

    • Thanks. Also, click on the link that say News you can Use. It is our companies President’s Blog and it is a pretty good wone. He is all into the social networking and blogging thing too.

      Hope you are warm in FLA cause it is really cold here

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