Feds to Lower Interest Rate to 4.5%

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%. Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week. The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market. Last week's Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie, Freddie and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms. Mortgage applications more than doubled as a result, the Mortgage Bankers Association said Wednesday. Much of the activity stemmed from homeowners looking to refinance. Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities. Meanwhile, a coalition of industry groups have banded together under the "Fix Housing First" banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%.
Experts see both pros and cons
Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend. This program is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes. But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit. Rates are already inching up, hitting 5.75% on Wednesday. Several government attempts to lower mortgage rates this year have failed to have a lasting effect. Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates.Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments. Rates have not fallen below 5.37% in more than 45 years.