Mortgage Bailout Lowers Rates
By AMY HOAK
September 14, 2008
The government takeover of mortgage giants Fannie Mae and Freddie Mac has pushed mortgage rates lower, a boon for some home buyers and for homeowners seeking to refinance, but it is not automatically going to make home loans easier to obtain.
In the wake of the takeover, interest rates on 30-year fixed-rate mortgages dropped substantially, falling under 6% for the first time since May, according to Freddie Mac's weekly rate survey. The national average for the 30-year fixed-rate loan was 5.93% for the week ended Thursday, down from 6.35% the prior week and 6.31% a year ago.
Still, coming up with a bigger down payment has been a barrier for some first-time home buyers, while others have struggled with tighter underwriting that lenders have put in place in response to the weakened housing market.
"The credit-standards pendulum has been swinging to the conservative side, and it could swing toward the middle," says Dan Cutaia, president of Fairway Independent Mortgage, based in Sun Prairie, Wis.
But any loosening of underwriting standards could be relatively small, and it's unlikely that no-down-payment or no-documentation mortgages -- staples of the housing boom earlier this decade -- will make a return in the near term, Mr. Cutaia says.
After all, Uncle Sam had to step in and take control because of the problems created by having bad loans on the books and the agency now running the two mortgage giants certainly is not going to risk making more bad loans, says Greg McBride, senior financial analyst at Bankrate.com.
Rates Fall
The government's move helps to stabilize the shaky mortgage market and take out some of the unknowns, removing some of the fears of mortgage investors, says Bob Moulton, president of Manhasset, N.Y.-based Americana Mortgage Group. Without worries about Fannie and Freddie, more people were willing to invest in mortgage bonds, creating downward pressure on loan rates.
The lower rates could hold for a while, some mortgage professionals say -- a welcome respite compared with the mid-6% range the 30-year mortgage hit at various times this year.
Another area where the government bailout could help homeowners: So-called conforming jumbo mortgages could become more obtainable and affordable, says Gibran Nicholas, chief executive of the CMPS Institute, a training, certification and membership program for those who provide mortgage and real-estate equity advice. These are mortgages at the top of the conforming limit, as high as $729,000 in high-cost areas including California.
Recent legislation created this new breed of mortgage when conforming loan limits -- the top mortgage amounts Fannie and Freddie were allowed to finance -- were raised in an effort to make bigger loans more affordable.
A break on conforming mortgage rates could, in turn, help bring some stability to the housing market if buyers decide to take advantage of them, says Lawrence Yun, chief economist of the National Association of Realtors. "There is generally one quarter lag time between when rates fall and when home sales pick up," he says, adding that home sales might improve in the fourth quarter.
Coupled with lower home prices and a temporary $7,500 tax credit for first-time home buyers, there could also be more activity from those who don't currently own a home, says Jim Sahnger, a mortgage planner with Palm Beach Financial Network.
Refinancing 'Boomlet'
A rate drop could also spur somewhat of a "refi boomlet," in the next several months, Mr. Cutaia says.
Some of the people seeking to refinance are those with adjustable-rate loans that have already or will soon reset to higher rates, says Greg Willis, president of retail lending for Ace Mortgage Funding in Indianapolis.
Still, people who are underwater on their loans -- owing more on their homes than they're currently worth -- probably aren't going to get any additional relief due to this recent Fannie and Freddie development, says Jared Bernstein, senior economist at the Economic Policy Institute.
"There are significant numbers of people out there who still have homes worth less than their mortgages and it doesn't change that game," Mr. Bernstein says
