Mortgage Rates Are Holding Steady: When Will The Bomb Drop
By Joanna Hamilton on February 9, 2011, 12:47 pm
Mortgage rates held relatively stable this week on news that the economy improved and inflation remained in check at the end of 2010. In the fourth quarter, the economy grew at a 3.2 percent annualized rate, compared to 2.6 percent in the third quarter, and was led by a 4.4 percent gain in consumer spending. In addition, the core price index for consumer expenditures rose by an annualized rate of 0.4 percent, which was the smallest increase ever since records began in 1959.
A Quarter Point
“Even going back a couple of years, rates were in the 5 percent mark. So we start going back to the original talk about what a quarter point would do on a $300,000 mortgage…well, if we start talking about that same $300,000 mortgage on a 1 percent savings of an interest rate, we could be talking $300 plus on a monthly mortgage payment as a savings.”
Keeping Interest Rates Low
Fannie Mae and Freddie Mac buy mortgages and mortgage-backed securities, which helps keep interest rates lower. The government has expnded their roles since the housing crash, alowing them to buy mortgages as expensive as $729,750. There is now a good chance that that limit will be lowered when the temporary increase ends on Sept. 30, Seiberg wrote. The government may also demand buyers put 20% down for qualified residential mortgages.
Congress Needs A Strategy
In the end, it appears as though the most promising path for Congress is to commit to a credible strategy that puts the GSEs in receivership and liquidate their operations over a 5 to 7 year period. Any shortfalls would be covered by taxpayers so no creditor losses anything in a wind-down or is tempted to sell their securities. In the future, Congress would keep Federal Housing Administration (FHA) mortgages available for borrowers under certain income and mortgage loan thresholds and leave the rest of the market to the private sector. The likely result is higher mortgage costs, as the old guarantees would now be paid for by mortgage borrowers instead of taxpayers. If Congress wants to offset some of this cost increase, it does have options – even though some may not be popular with consumers. For example, mortgages could be made fully recourse to the borrower so homeowners’ assets would be at risk in the event of default.
