WASHINGTON (MarketWatch) - The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.
The plan would employ Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1% lower than current rates.
The measure is under consideration as part of the Treasury Department’s continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported.
As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.
Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.
Treasury may set mortgage rates at 4.5% to boost sales - MarketWatch.
Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.
- What’s the only way possible that I’m aware of to lower mortgage rates? By raising the price of mortgage backed securities which lowers the rates on them. Lower rates on mortgage backed securities equals lower mortgage rates.
- How do you increase the price of mortgage backed securities? The only way that happens is by increasing the demand for them.
- How do you increase the demand for them? Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
- How is the US government going to come up with that money? All joking about printing presses aside, in reality, they are going to have to borrow the money.
- How do they borrow the money? By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.
So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?
- Demand stays the same.
- Supply goes way up because the government is flooding the market with new debt.
- Price goes down because the supply/demand numbers are out of balance.
- Rates go up because price does down.
I was talking to another blogger this afternoon and he said it quite well. We have a supply problem. There is simply too much debt floating out there to work the way that Hank and Bernie want it to.
So far, the market has shown that they would rather earn less (frankly close to zero) and invest in US Treasuries than they would invest in mortgage backed securities. Given the history of Fannie and Freddie recently (how many billions did they lose in the 3rd quarter?) I’m not sure anyone can blame them. Can you?
So, we’ll have to see how the details pan out, but I’m not optimistic that what the plan is proposing will actually work. It might actually backfire and due to the increases in government borrowings have a reverse effect and keep mortgage rates higher.
Stay tuned, it’s going to be an interesting ride!
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Comments
6 Comments so far
Buyer
Do you still recommend locking rates if closing date is Dec 19, 2008?
Tom Vanderwell
Yes I do. Is there a chance that rates could go lower? Yes there is. However I feel that the “snap back” possibility is worse and we could see rates spike….
Tom
Spencer Rascoff
Tom,
Great post.
This is such a fascinating topic. Although a policy like this does sort of offend my general political instincts against government intervention in free markets, I have to admit that something
this dramatic would help get the housing market jumpstarted (which would be great).
Mortgage Rates — Just Gorgeous! | Zillow® Blog
[...] is reporting that the Treasury Department is flirting with the idea of 4.5%, and our colleague Tom Vanderwell over at Mortgages Unzipped throws more analysis behind the headline by shedding doubt that for 4.5% to happen, a lot of other [...]
TD
well i do not know where to begin,so i will begin with this…
[1]when people/investors were clamoring for MBS -mortgage rates were not very low-because of other excuses like the LIBOR etc etc ad nauseum!
[2] in the not too distant past in Europe you could get a 30 year mortgage for 4% or slightly under that all day long!!!!!!!!!!
why is that? because the governments in europe back the securities and when people get in trouble the govt buys back the mortgage and keeps the people in their homes as renter /leaser until they could buy back in-there is no good reason why WE INN AMERICA SHOULD SUFFER FROM GREEDY MARKETS AND MANIPULATION-ESPECIALLY THE BOTTOM FEEDING THAT IS GOING ON!!!!!!!!!!!!!!!!!!!!!!!
[3] Now buyers-first time and refinancers should be able to get a mortgage at 3% or little higher-screw the free market-who needs em- when they have huge losses they ask for my money and yours in the form of a bailout-higher interest rates for speculators and investors to keep the greed factor down and development under control-low rates for HOMWOWNERS-AT 3%! A 200K HOUSE HAS A 6K A YEAR IN INTEREST-THAT IS $500$ IN MONTHLY INTEREST-THROW IN $100 TOWARDS PRINCIPLE $150 IN TAXES AND INSURANCE AND YOU END UP WITH AROUND $750 A MONTH MORTGAGE PAYMENT PROBABLY A LITTLE MORE BECAUSE IT IS AMORATIZED WHICH MEANS THE BANK GETS THEIRS FIRST!!!!!!!!!!!!!!!!!!!!!!!!!!
BANK STILL MAKES 50% RETURN OVER LIFE OF LOAN!!!!!!!!!!!!!!!!!!
THE ARGUMAENTS IS THE BANKS HAVE TO MAKE THAT MUCH TO PAY FOR RISK AND COST TO SERVICE THAT LOAN-MOST OF THAT IS RISK-MOST OF THAT IS ROBBERY!
you can look at it this way-if the banks did not charge so much in interest then most could afford a decent home -maybe not in the best neighborhoods of the biggest cities but they could afford a home AND MOST IMPORTANTLY AFFORD TO KEEP A HOME!
—-AT 6% THE BANK DOUBLES ITS MONIES!!!!!!!!!!!!!!!!!!!!!!!!! END OF STORY
HOMES WOULD BE A MORE LIQUID INVESTMENT-SHOULD NOT COST SO MUCH TO BUY SELL A HOME EITHER-THOSE COSTS OF CLOSING ARE RIDICULOUS-THE WHOLE SYSTEM NEEDS AN OVERHAUL-IF HOMES WERE MORE LIQUID THEN MAYBE SPECULATORS WOULD NOT HAVE SUCH A EASY TIME MANIPULATING THE HOUSING SECTOR-they can stay in equities and commodities
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