Recently there has been a lot of chatter about a plan by the US Treasury Department to use the influence of Fannie Mae and Freddie Mac to lower mortgage rates down to 4.5% for home purchases. The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages in order to attempt to stimulate the housing market.
The plan remains in discussion and may not be made final before the Bush administration's term ends in January. President-elect Barack Obama has said repeatedly that his administration would do more than the current one to help struggling homeowners but he has not offered specifics.
The Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.
The plan is very similar to an idea floated in October by R. Glenn Hubbard and Christopher Mayer, academics at Columbia University's Business School. "I think a program to substantially bring down rates for homebuyers would be an incredibly valuable program, and I think it captures a real part of solving what has been an incredibly challenging dislocation in the credit markets," Mr. Mayer said in an interview. He estimated the idea under consideration could quickly help 1.5 million to 2.5 million people buy homes, giving a major boost to the housing market and broader economy.
Normally, the rates lenders charge consumers, including home buyers, are determined by the secondary market, in which investors buy mortgages or mortgage-backed securities. But Treasury Secretary Henry Paulson views lowering mortgage rates as key to fixing the housing crisis; hence the mortgage-security-buying program announced last week.
Here is an article with details of the plan - http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm
So, can you expect 4.5% interest rates? I say don't hold your breath.
Let's review the proposed government plans that have failed so far this year:
-FHA Secure - this program was aimed at helping homeowners faced with foreclosure to save their homes, it bombed and never really got off the ground.
-Hope for Homeowners - this plan was supposed to replace FHA Secure, and to date it has bombed, with very few lenders participating.
-$700 billion bailout - this was supposed to be used to purchase mortgage related assets of banks, but quickly changed to the Federal Government investing in banks to provide them with much needed liquidity; while the final implementation of the plan should be successful, the original intention was abandoned.
The only successful government intervention thus far was last weeks announcement by the Federal Reserve that they will purchase $800 billion in mortgage backed securities from Fannie Mae and Freddie Mac- this announcement lead to an immediate decrease in interest rates by .5%
The government realizes that until housing bottoms, the economy overall will lag. Stabilizing housing is the first step in economic recovery, much like housing is usually the first sector of the economy to show signs of struggle when we are headed into a recession. Jim Cooper of Business Week wrote a great article about it here - http://www.businessweek.com/magazine/content/08_49/b4111014822796.htm
The government is trying to solve the problem, and this program might prove me wrong, but I am not going to count on it…….But lets just say that it did get implemented. This is the effect that you could see:
Interest Rate and Corresponding Principal & Interest Payment
Loan Amount 4.50% 5.00% 5.50% 6.00%
$ 100,000 $506.69 $536.82 $567.79 $599.55
$ 125,000 $633.36 $671.03 $709.74 $749.44
$ 150,000 $760.03 $805.23 $851.68 $899.33
$ 175,000 $886.70 $939.44 $993.63 $1,049.21
$ 200,000 $1,013.37 $1,073.64 $1,135.58 $1,199.10
$ 225,000 $1,140.04 $1,207.85 $1,277.53 $1,348.99
$ 250,000 $1,266.71 $1,342.05 $1,419.47 $1,498.88
$ 275,000 $1,393.38 $1,476.26 $1,561.42 $1,648.76
$ 300,000 $1,520.06 $1,610.46 $1,703.37 $1,798.65
$ 325,000 $1,646.73 $1,744.67 $1,845.31 $1,948.54
$ 350,000 $1,773.40 $1,878.88 $1,987.26 $2,098.43
$ 375,000 $1,900.07 $2,013.08 $2,129.21 $2,248.31
$ 400,000 $2,026.74 $2,147.29 $2,271.16 $2,398.20
$ 417,000 $2,112.88 $2,238.55 $2,367.68 $2,500.13
In essence, buyers could qualify for anywhere from $30,000-$80,000 more in loan amount, which could boost the housing market.
Again, it is important to remember that this is strictly in the developmental stage. Just the perception that it could happen could trigger more interest in purchasing and selling and as we know in these times, perception is very important.
As your trusted mortgage advisor- we will continue to keep you update in these events. In the meantime, when we can be of assistance give us a call.
