By Andrew Hoffman, Mortgage Partners, Santa Fe
I’ve been busy in the past week dealing with refis sparked by mortgage rates that are hovering around 5%; however, a number of potential refis have been put on hold because of the Treasury’s leaked plan to peg mortgage rates at 4.5%. While this plan is only rumored and comes from a the Treasury, which has announced and bagged two previous mortgage bailout plans, it has caused some borrowers to pause.
At the heart of the plan that the Treasury is reportedly considering the idea that lower mortgage rates will boost home sales and eventually house values. The plan hasn’t been officially announced so it’s not certain exactly what the Treasury would do, but one way it could work would be for the government to offer to directly purchase all newly originated loans by banks and mortgage lenders provided the loans carry rates of 4.5% or less. Proponents of the plan say the plan would be costless, and might even turn a profit, the government can borrow money at 2.7% to fund the program, pocketing a profit of 1.8%.
“It raises the question as to whether the government should be offering low mortgage rates all the time, not just during a crisis,” says Laurence Yun, chief economist of the National Association of Realtors, which has been pushing for a plan to lower mortgage rates for the past month. Yun predicts lowering 30-year fixed mortgages to 4.5%, from their current rate of 5.125%, would produce an additional 500,000 home sales in the next year. “We need to do this because the economy will not stabilize until home prices stabilize,” says Yun.
But critics of the plan say that is will do little to boost sales, and could wind up being surprisingly expensive. In order to get lenders to make the loans at below market rates, the government would have to basically pay banks the difference between the market rate and the 4.5% they would like banks to lend at — currently 1%. That would still leave a profit of 0.8% on every loan the government helped originate through the program.The government, though, would only be able to pocket that profit if everyone paid back their mortgage in full, which even in good times is not the case.
On another troubling note, some economist question whether the lower mortgage rates would even boost sales or home values. A 2006 study of mortgage rates and New York City housing prices going back to 1975 found no correlation between lower mortgage rates and higher housing prices, or vice versa. A professor of economics at the University of California, San Diego, says rising home sales were the result of deterioration of lending standards and not lower mortgage rates.
What’s more, the Treasury’s proposed program would only make the low-cost mortgages available to people making new home purchases. That would do little to help people who are already behind on their mortgage, or at risk of facing foreclosure. And many economists argue housing prices won’t stop falling until foreclosure rates come down.
I personally believe that, though the intent is to reduce the inventory of homes on the market, passing these savings on to refinancings would put money in the pockets of those who are able to spend. A borrower with a $300,000 mortgage who drops his rate by 2%, would have an additional $500 per month to save or spend on stabilizing a consumer economy. Given the Federal governments track record, I doubt whether we will ever see this program. In any case, market rates at 5% should be enough to spur a flurry of purchases and refinancings