Saturday, December 6, 2008

Santa, all I want for Christmas is a 4.5% Mortgage Rate

Homeowners get excited about a Holiday rumor.
Even IF it somehow stuffs our stockings, will it just be a lump of coal?

December 6, 2008 -- BLOOMFIELD, MI – On Wednesday, December 3rd, beleaguered homeowners thought Santa really did exist and they were getting an early Christmas present. A rumor hit the media that the government was going to lower mortgage rates to 4.5% to help people stay in their homes and slow foreclosures. CNN picked up the rumor CNN Article.

On Thursday, emailed stories were flying around the internet and phones at lenders started ringing off the hook. The Wall Street Journal picked up the story WSJ Article.

By Friday, TIME Magazine had the story on their internet site TIME Article. The rumor had evolved into only applying to mortgages used to purchase a home.

The serious coverage and how fast the rumor spread, shows that a solution to the housing crisis is near the top of everyone’s Christmas Wish List this year.

How much relief would such a rate drop give a homebuyer? As the graph here show, a 1% rate drop on a $200k mortgage would save $122/month. A 2% drop would double that amount.

Experts are all over the board on how many more homes would sell if this rate was available, if the increase in sales would be enough to prop up home values and slow foreclosures.

Of more immediate concern is how likely the rumor is to become reality? To do so, the government could just set FNMA/FHLMC rates at 4.5%, something they can do now that they own the two. These would lead to issues though, of either the government owning individual mortgage or having to sell the mortgages on Wall Street at a loss. The government’s other option would be to buy all the mortgage-backed securities it can to drive market yields, and hence rates, down.

Either way, the government ends up subsidizing or owning mortgages. Can you say, “Socialism”? How about, “Communism”?

What should a homebuyer or homeowner do? Well rates dropped last week and although they’ve given some of that drop back this week, they are lower than they’ve been all year. The dip last week was short-lived, but another may be coming. Borrowers need to get a mortgage application in NOW to be ready to lock at a moment’s notice!

If Santa does stuff our stockings with a 4.5% rate, borrowers can always refinance again.

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