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Getting mortgage rates down is the most effective way for the government to fix the economy

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January 26, 2009 – Comments (5)

 

Despite the Fed's efforts to lower interest rates, like cutting the Federal Funds rate to nearly 0%, the average rate for 30-year fixed mortgages is still sitting at well over 5%.  The gap between the rates on 30-year mortgages and 10-year Treasuries has not been this great during a period of Fed loosening since 1982. The yield spread between the two is currently 2.5%, compared with an average of 1.7% over the past twenty years.

The government needs to find a way for this spread to narrow and do it quickly to put a floor under housing prices and help stimulate the economy.  Getting mortgage rates to drop into the 4s would do much more to put money into people pockets than a stupid piddly one-time $500 payroll tax break from the government would do or those dumb stimulus checks that they sent out last year did. 

For example, if I was able to shave a point off of my mortgage rate by refinancing (I currently have a 30-year fixed at 5.75%), I would save several hundred dollars per month.  That's every single month for the next 30 years, not just a silly one time pop.

Getting mortgage rates to drop further should be priority number one for the new administration.  Of course, my interest in seeing rates drop is somewhat personal because I want a lower rate for myself, but that doesn't change the facts here that getting rates down would likely be the single most effective and quickest way for the government to fix two major problems with the economy...falling home prices and slowing consumer spending.

Putting hundreds of dollars per month back in the pockets of homeowners who refinance and shaving hundreds of dollars per month off of the monthly cost to buy homes that are on the market would be a much better way to stimulate consumer spending than than extending unemployment benefits for a couple of months or tossing people a token $500. 

Studies have shown that one-time tax breaks are more likely saved than spent.  They don't do nearly as much to stimulate economic activity as permanent tax cuts do.  It is unlikely that the new administration will be able to pass through any sort of tax cuts with the budget deficit soaring and Democrats like Pelosi screaming for the immediate repeal of the Bush tax cuts.  If they government won't cut taxes permanently, it can at least cut people's monthly expenses.  Lower mortgage rates would have almost the same effect as a tax cut.

This situation is a little tricky because by making a nice spread on mortgages, banks that are desperately in need of cash are making money, but putting a floor under falling home prices would actually probably be better for banks than having them make a few bucks more on the mortgages that they issue.  One of the main reasons that banks keep going back to the government with their hand out is because the value of the assets on their books keeps falling.  The imploding housing market is one of the major drivers of this asset value deterioration.

I'm usually not one for government intervention.  I prefer the government to spend less, not more and to interfere less with the free markets, not more.  I realize that a 5% mortgage is already a historically low rate.  My being in the same camp as the National Association of Realtors chief economies Lawrence Yun, who also believes that 30-year mortgages should be in the 4% range, makes me sick.  However, if Uncle Sam is going to waste trillions of dollars on all sorts of ineffective programs in an effort to prop up the ailing economy anyhow the government might as well use its money effectively and actually help me out in the process.

Highest Rates in Generation Confront Everyone Without Fed Funds

 

Deej

5 Comments – Post Your Own

#1) On January 26, 2009 at 7:21 AM, TMFDeej (99.25) wrote:

Just in case anyone was wondering how the Federal Reserve would go about lowering mortgage rates with the Fed Funds rate already sitting at nearly zero, it would probably have to distort the current market by purchasing longer-dated Treasury securities in an effort to push up their price and bring down their yield.

Deej

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#2) On January 26, 2009 at 9:42 AM, lquadland10 (< 20) wrote:

Gee and I thought it would be lower house prices and higher wages for the common worker and less taxes on corperations and smaller gov. Also getting rid of the IMF aka: the FED. Gee I guess I am wrong again. LQ>  ;-)

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#3) On January 26, 2009 at 10:38 AM, Terok1313 (30.45) wrote:

One problem you have to consider is that in a deflationary housing environment, it can be difficult for recent homebuyers (probably anyone in the last 3-4 years) to refinance the debt.

Take a theoretical house that was purchased at $250k with 20% down.  The original loan amount was $200k.  Now say a couple of years have gone by and the balance on that debt is $190k, but that the house has depreciated by 10% (which is a rather modest depreciation in this environment).  So, let's go refi that sucker!

Given the depreciation, the house is now only worth $225k.  The bank is going to still want 20% down, which means they'll only loan you $180k.  That means you have to pay down your debt an extra $10k before you can even consider the refi.  If you save $200 a month as a result, it'll take you about 4 years to break even.  Probably more like 5 after you tack on the refi costs.  Might be worth it for you, might not.  But unless you have that $10k in the bank, you won't even close the deal.

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#4) On January 26, 2009 at 4:40 PM, jvdauburn (< 20) wrote:

We need:  a:  4% mortgage available to all, even investment property; 

b: mortgage insurance for those who have less than 80% LTV; 

c: mortgage insurance for those whose credit scores have been impacted by a foreclosure

Then you would see some of the housing stock being bought up, appraised values would stabilize and begin to go up.  I know I would invest and refinance my house which is currently paid and has 100% equity.   

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#5) On January 28, 2009 at 8:03 AM, Bankman007 (< 20) wrote:

Full Disclosure:  I'm a mortgage originator and I work for a large bank in the North East.

I agree that lower rates put cash into the pockets of those that refinance. However, low home valuations are preventing many that are upside down from simply refinancing their existing balance and lowering their payment.  There is help for those with at least some equity.

PMI is available to 95% of the value (90% in a declining market) and if done properly its not so bad....Two examples:  90LTV with PMI on a 360K loan added about $45 to the payment.  Customer still saved $265 per month.  The other is an 85%ltv on a 20 year term and they made a one time payment of about $1000...customer still saves $106 per month.

I hear all too often "I don't want to pay PMI" But some of these people aren't aware that inspite of the PMI they'd still save a bunch. Obviously, PMI is not ideal but it shouldn't prevent you from talking with a knowledgable loan officer.

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