The Bailout: What Effect Will it Have on Rates?

That’s the multi-billion-dollar question.  Bottom line, when and if it passes, is that no one really knows.  So I thought I’d pose the question to those who have lots of experience in the industry — the smart mortgage professionals who write on Mortgages Unzipped.  Here is what some of them think:

What is your perspective on how the bailout may affect mortgage rates? 

Tom Vanderwell, Straight Talk About Mortgages 

“I’m not really sure, but here’s my take on a couple of scenarios:

• If the bailout works well and truly stabilizes the markets, we could see rates holding steady and consumer confidence returning and more people venturing out into the real estate market.
• If the bailout doesn’t work well and the markets continue to remain troubled, then we’re going to see the non-Fannie-Freddie-FHA markets dry up. That doesn’t bode well for those in the higher priced markets (where over $417,000 is needed to buy a house). 
• If the bailout raises concerns about the borrowing capabilities of the US Treasury (because of the massive amount of debt that it’s taking on, then I think we’re going to see rates start creeping upward.

Of those three options, I’d put the odds at 10% that the bailout works well, and split 40/50 between the other two.”

Rob Cochems, C&M Mortgage Lending

“With credit entirely ceased up right now, in the near term the passage of this bailout should help ease rates.  However, long term many things remained to be answered to even try to make an educated guess.”

Martin Wareing, 720 Mortgage

“I do not think the bailout will lower rates and/or loosen lending standards from what was considered normal lending activity. Yes, recently business lending had seized up and there was a much greater expense to “borrow” for companies and banks if allowed at all.  That facet of lending could see a reprieve from panic borrowing pricing/terms, but will still be more expensive than terms from 6 months ago. It seems highly unlikely that lending standards and rates would go back toward the activities that got us into the crisis we have today.”

Dan Melson, Dan Melson.com

“Right now, the markets are in panic mode.  Not in the sense of raising rates, but in tightening of standards.

In the short term (one week or two), rates may drop.  Medium to longer term, there will be a significant rise.  If there isn’t much money to be had, the competition for it is going to get tougher.  This means the price will go up.

It’s going to take months to get out of this psychological trap they are in of closing the barn door after the horse has escaped.  Then putting on an additional door every time they realize that another horse escaped months (if not years) ago.  Meanwhile, the lenders’ shortsighted panic is going to continue to make things worse than they need to be.

This isn’t to say there aren’t areas that are ready to recover.  San Diego is so underpriced right now that it isn’t funny - and people are starting to figure it out.” 

September 29, 2008