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Could Mortgage Interest Rates Drop to 4.5% with Treasury Intervention?

The latest rumor (anonymous comment) coming from our "tight lipped" bureaucrats in Washington is that Treasury Secretary Henry Paulson is considering a new plan to reduce mortgage rates in another bid to revive the U.S. housing market. The Treasury could, under this new plan, step up purchases of mortgage backed securities (MBS) to drive down interest rates on some loans to 4.5 percent, the official said on condition of anonymity. The possibility that this plan could change is enormous.

Mortgage applications surged by a record last week and the average rate on a 30-year fixed-rate loan dropped to 5.47 percent, the lowest level since June 2005, according to the Mortgage Bankers Association. So, what will this latest "news" do to the clients that have started application and (probably) locked their interest rate when they hear rates could drop another full percent?

Lowering mortgage rates to 4.5 percent might allow a lot of homeowners to refinance into a cheaper loan but some financial experts expect far fewer people will actually qualify for the lower rates. There are already a number of additions to rates due to credit score, loan to value and purpose of loan. With substantially lower rates, lender will probably tighten these requirements, even more.

I am not certain of what this announcement means to future business opportunities. One "expert" stated that he thought the lowering of the fixed rates to 4.5% could mean that 90% of the mortgages in existence could benefit from refinancing to the new, lower rate. If true, business could get quite brisk.

What are your feelings about having interest rates drop like this? Is it sustainable?

authored by Fred Chamberlin, senior mortgage consultant, Eugene/Springfield Oregon, 541-342-7576

Feb. 16, 2009: Just an update. I am getting some recent comments as to if this is possible or not. If you read my comments below, you will find that it has already happened once and may again. Also, I have deleted some long winded comments that I didn't believe gave any good information to the post. Thanks for reading and come back again to see what people are still saying.

Posted by Fred Chamberlin - Eugene/Springfield's #1 Experienced FHA Mortgage Consultant on 12/04/2008 08:09 PM

Comments (68)

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Originally posted at: Fred's Mortgage Blog: Could Mortgage Interest Rates Drop to 4.5% with Treasury Intervention?

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68 Comments on Could Mortgage Interest Rates Drop to 4.5% with Treasury Intervention?

DEC

2008

im not sure if it is sustainable, but it might be necessary to get people back into the vacant property market

Another refi boom...that might help the current situation as far as slowing the foreclosures and spurring sales. Not a bad thing...certainly will help the economy.

I think it could last for a few hours... people need to be prepared for longer "turn" times in order to close!

It could work and could help people stay in their homes who are on the edge of loosing them.

Paulson seems to be on the fence right now with the second half of the bail out money handout. With no checks or balances set up before hand, there has been questions to were and what the money has been really going for.

I would like to see some smart changes.

Not sustainable, not even close. Unfortunatly, I have belived that part of the economic issues within the mortgage lending industry has been historically low rates for far too long. Higher rates would allow for higher profit margins, increased loss reserves, and perhaps some loosening of the qualifying requirements. Additionally, the MI companies and credit reporting agencies need to be looked at closely. Seems those tails have been waggin this dog for long enough.

I think it is a step in the right direction, but we are not taking a step we are in a marathon.

I don't know where that started, but I caught that on the news this morning that the feeling was 4.5% interest rates. Right now rates are great! To think they could get that much lower is outstanding. The market is driving the rates in that direction though.

yet another program for which I will NOT qualify. How can you refinance into a lower rate if you no longer have equity, or if you have credit problems (not me), loss of job etc?

I don't know why people get so hung up on rate anyway. Seems like the previous market consisted of people who were willing to grossly overpay for houses because the rate was low, but now the rates are slightly higher, but homes are way cheaper nobody wants to act.

Robert - I am afraid it might also stop what is going on now if people now decide they should wait. That is my concern.

Terrylynn - I hope it does that, but I am never confident in what our officials do. Wait and see.

Eleanor - Just like you said in your recent blog, people need to have an application in process to take advantage of rates when they happen.

Timothy - I don't think this will help those already in trouble except maybe make selling easier. I am pretty certain qualification will tighten even more.

Scott - I agree but maybe this is what we need for a short term fix on a long term problem????

Sean - Marathon is right and generally, sprinters don't win marathons.

John - Just the rumor of this happening may be enough, but I don't expect it to last.....but then I didn't expect rates to be as low as they have been for as long as they have been.

Michelle - It is a mystery. When will we get stability, that is what is needed.

It is possible that some of those qualified buyers might just decide to come down off the fence and buy.

I would be nice if rates would drop and then stay down. I don't believer you would see as big of a rush to buy as you would re-finance. Any increase in buyers to soak up inventory would help in many markets.

We will see what happens. We all need to tell everyone we know that now is the time to Buy and Sell! Sellers may take a hit on the sale, but will clean up on the buying side!!!

I agree with some of you. I think we'll see more refinancing and less buying and selling. Atleast the mortgage people will be busy. I just wonder how many will actually qualify. I'd attempt to refinance my rental units and my house just to save money on payments, but I'm not sure i'll qualify anymore.

You also have to wonder how many people are going to refinance the equity out of their homes when they get their new rate.

It will be fantastic for those that are able to take advantage of it

Teral - It would be nice to see the fence sitters to move. Action is what we need to turn the market around.

Jerry - I think the lower rate could put some urgency in the market and that will help either refi or purchase business. I can't see the rates dropping and staying low, but I have been wrong in the past.

Allen - Yes, now is definitely the time.

Dvid - With the new rules, rentals are going to be harder to refinance and purchased without significant down payment. Plus there are limits as to the number of properties financed. Different lending climate for investors.

FRED, Who would have ever thought we would be seeing these low interest rates again but then who thought we would be paying $1.57 for gas. It is quite a strange time we are living in.

I've been taking calls all day from clients who think the Treasury is just going to pass some bill that will automatically drop all 30 year fixed rates to 4.5%. Rates are good right now. A slow drop wouldn't be a bad thing, but I wouldn't mind having a little less volatility.

Tim Storm

It probably goes to show that the government doesn't have a clue. The election is over, they now have a little time to think and get something right.

Congrats on the feature. Well on your way to 100k points.

folks, although it's still an artificial influence- government intervention in a free and open market- how can we believe our market is free anymore. We're becoming almost as socialized as China.

That said, this could free up dollars in the market that are currently being used to pay interest. Hopefully some of that money will see it's way back into the economy and that could only help. We are all losing sight of the FHA streamline refis that could benefit from this. No appraisal as long as they do not finance more than their original loan amount. Most of the FHA customers that could benefit from this rate closed before 2004 anyway, when rates where higher and values weren't so inflated.

and this would certainly help affordabilty for first time buyers. Bring some people back into the market and maybe help absorb some of our excess inventory. That's all part of what must happen for us to get out of this mess.

Personally I must say it's one of the better ideas I've heard come out of DC. Granted, it's a subsidy and we taxpayers would be paying the price for those low yields, but it seems better than owning a bunch of car manufacturers...

Gerry Suarez, Jr.

Your FHA Loan Pro!

When considered from a recent historical perspective, rates are pretty darn low right now. It seems to me that governmentally manipulating (and keeping) rates @ 4.5% would require massive expenditure. Let's say rates were artificially set at that low rate ... what would be the future impact on the housing economy. How willing would purchasers (who took advantage of the low rates) be to make their next move in say 5-7 years when maybe rates have gone up considerably due to market forces. Maybe artificially low rates would plant the seeds of the next market slump. Remember when sub-prime loans seemed to be just the vehicle to increase home ownership in the USA. Governmental manipulation of markets does not always have a happy ending.

Fence sitters, IMHO, are not on-the-fence due to high rates, they are there because of high fear.

Wow! This could really help us all. Hope it happens...I head it earlier today but thought they were misquoted. Keep us updated on this, Fred....we're counting on you!

Well Fred! You always have some of the most interesting post and I always learn something from them and the people that comment on them. I have been reading this one allot today to see what people say and responses. It really does allow me to look at this from a different angle then I might first take.

Thanks for putting out such great post Fred.

Don't know if it is true - I heard someone say it was only for purchase ... Which if true is crazy b/c those in higher rate loans and bad situations need it most to stop foreclosures. In any case, I hope all us lenders still in this business can benefit. I'll just stand on the side and wait. Keeping up with ALL of the news makes my head spin.

If this happpens and they do NOT let people re-finance into a 4.5% rate...there is going to He...... to pay.....

LOTS of people will be upo in arms and will NOT like what the govt did for the financial sector...but did NOTHING for those taken advantage of by it......

Featured @ Club chaos

Boy, take a couple of hours, fix dinner and watch TV and what happens, you get a feature. Thanks everyone for your comments and I will see if I can answer them all, cuz that is what I do.

Marchel - no fair, we are paying $1.70 here, of course, we probably have higher state gas tax and I know we have a higher city gas tax. Actually compared to the price of oil, we are about right on gas price, for a change.

Tim - Volitility is going to be the name of the game for a while. I would love to see stability, but I am not counting on any.

Charles - I agree the government doesn't have a clue, but what else is new.

Thanks Michelle, I am reaching but really thought this story needed to be told.

Gerry - I am torn on this also, but by investing in MBS, I think there is a good possibility that the Treasury could actually make money. Wouldn't that be a kick in the pants.

Larry - I think your analysis of the fear factor is right and doubt that the rates will remain low for a long time. I also think your question about future sale could have been used previously and people still have to move on to new properties.

Cecily - Just get those Salem customers lined up. I will even drive up there to see them.

Timothy - You would think at first look that this was all good, wouldn't you? There are almost always unforeseen consequences. That is what is so good about this format, we get additional viewpoints.

I have heard the only for purchase statement too Steve, but I don't see how that could possibly be the situation. MBS are sold as a group, how would you package purchases vs. refinances? It will be interesting to see how it shakes out. To be real honest, we are damn close to the 4.5% now for purchases and refinances. If any of you watched Angel's In The Outfield, you might remember this line: "It could happen!"

Alexander - I don't see it happening, but I could be wrong.

Carolyn - thanks for the feature, that means a lot.

Fred.. this sounds like great news.. I would love to see rates go this low

Fred, this will be interesting to see how it plays out. People have been begging for rates to crash, and now, basically they are going to. Thing is, this will be for a limited time, so I am wondering how many people will see how low they can bottom out. I would gander to bet that most people play the waiting game. Unless this can happen overnight, it was crazy for them to even let it out. Just my opinion.

Roland - I think it will be a help, but I am reserving judgement. It could be a trojan horse too.

Danny - You are right, it will be quick and then gone by my consideration. Luckily, I work for a company that does its own processing, underwriting, doc drawing and funding. We can work quickly. I recommend anyone thinking about refinancing, to get their application working now.

Fred, I am with you there. And I know exactly what you mean about the working for a company that does it all in house.

Danny - It means we have control, doesn't it. I hate having to tell a client that we are waiting on docs and have left a message but no response. That doesn't happen when you work in house. Of course, we still have the ability to broker the specialized products too. Sorry, too much advertising. Suffice to say, if you want to refinance, get started, you don't have to lock until you are ready.

DEC

2008

Fred,

I'm not sure how much the Treasury can do to move mortgage rates. Should they drop to 4.5% would bring around refinances for those who are not upside down. The overall strict qualification standards are still an issue, too.

Esko - Qualifications & loan to value may keep a lot of people out of it. It will be interesting to see.

Boy, I would be happy if we hit 4.5%! I am looking into refinancing!

Cristal - For you and many others, I hope it does.

Hi Fred,

I don't like this concept for three reasons.

1.) It is the government intervening in the free markets.

2.) It is incredibly expensive and I don't think it is the best and highest use of tax payer money.

3.) I am not convinced this is going to stimulate significant demand for real estate which is what the market needs. Everyone keeps saying it is about increasing affordability, but when you look at the numbers, housing has become much more affordable over the past two years yet there are 1.6 million fewer homes sales in 2008 than in 2006 (despite mortgage rates being lower in 2008 than in 2006). I think a 4.5% rate will help, but not to the extent that many think it will.

Is great news and great opportunities for both new buyers and existing owners to REFI ! Being a realtor we are pounding the table expressing the opportunity for buyers ! If I was a mortgage peson I would be doing the same thing !

4.5% interest rate would be great for our business. I hope that it does keep dropping.

Fred, Jeff makes a valid point that the government nor Realtors are considering. This really does not help anyone that is going to be under a 620 scoreand even the ones that are over it will get hit with add-ons that will drive the rates right back up. This is why I believe that customer shop. They hear that Joe down the road got 4.5% and they believe that they should be able to.

About 3 years ago, I had a customer that one of my loan officers messed up her file and I had to step in. When I initially talked to the customer, she was promised something by the loan officer that was not achievable. As a branch manager, I had the ability to do it with a huge price exception. I knew that my RVP would back it, so I told the customer that I would make it happen. He did, and the customer closed. What the issue was is that the customer told the loan officer that her friend "Betsy" got 7% and she knew that she had better credit than "Betsy" Turns out we did "Betsy's" loan too. So, back to the mistake. Loan officer promised the client that he could at the least match the rate Betsy got. Problem was, she held him to it and it was a recorded call.

The reason that I shared that is customers do not realize the circumstances behind "Joe's" lower rate. Just because he got it does not mean that you will automatically get it.

Fred - From all appearances, I'm late to the party:) Though I'm biased, I concur with my mentor... Mr. Geary. While this may prove to be a short-term boost for some individuals, I doubt the a large percentage of folks will reap the rewards. Now, if you combine this action with other economic 'shots in the arm' like low & stable fuel prices, tax relief, small business incentives, serious dedication & implementation of energy efficiency, job increases, common sense credit guidelines, crack downs on the power of MI Companies & Credit Reporting Agencies, etc... now we are talking. Shoot, I could of went on and on but I certainly don't want my comment to be longer that the post:)

As usual, time will be the ultimate decider.

Mark - I still think the market will determine its own level. The interjection of capital into the MBS is a better way (IMHO) than buying "toxic" loans from lenders. This is a way to fund new loans. Will we hit 4.5%? Will it make a difference? Time will tell.

Christopher - turst me when I say we are. I have had people walk away from deals because they are scared. Maybe, just maybe, this activity will overcome the fear factor. However, I think the constant volatility fuels the fear and it is the speculation driving that volatility.

Jeff - I am not promoting conventional financing over FHA, far from it. But believe it or not, I actually have made conventional loans to people with high credit scores and good down payment over the years and this will help them get a lower rate now. What is bad about that? Additional savings or spending is what this country needs so if I can lower someone's payment by $200 per month, isn't that a win-win? FHA is and will continue to be a weapon in my arsenal. Your example is a prime one that I was using even when sub-prime was easier. Will FHA rates drop too? Well, so far they have. If you have been forecasting recession since 2006, then maybe you are to blame for it. Stop talking recession, start talking recovery. Fear is and has been driving the bus.

Jeff part deux - Don't see it. Yesterday, the rate for a refinance (no cash out, no MI) and purchase were the same. What will change tomorrow? Finally, FHA is still the vehicle of choice for most purchases and refinances unless the client has excellent credit and substantial down paymen or equity. If you price it, a purchase at a 620 credit score with 20% down conventional still falls to the FHA with 3-5% down.

Greg - There actually reaches a point where it is counter productive for the rates to drop further. Although I would like a negative interest rate, that way the bank could pay me every month to live there. All in favor???

Danny - God may have created all men equal but credit, income and assets keep them unequal. As I remarked above, FHA will continue to be an exceptional source for financing the "unequal" among us.

Jason - Just don't be late to the wedding. I agree, this cannot be a single pronged attack. And, although he was not my choice, I am hoping that there will be a sense of well being within the country when our new president takes office. He generates trust and confidence and that is one of the things we really need. Confidence is the key to kick starting this economy. Also, feel free to go on and on any time you want to.

HI Fred, Great post - however I think that anytime the government gets involved we will have to pay in some other sector for it. Is this another short sighted attempt to "help" those in need and will this really be helping those that really are in need? When this is short lived they will be looking for something else to help bail those out in another sector of the markets. I see it as a never ending up hill battle right now. It will, in fact, be interesting to see exactly what does happen.

Sandy - great grasp of the situation. Ever watch a dung bettle roll a ball of dung up a hill? It reminds me our our Congress in a lot of ways.

I was thinking about this very thing this morning! Yes, I think it's doable and sustainable. But will it actually motivate buyers? Those who are sitting on the fence will probably jump off. I just had a buyer tell me this morning to move up her price point by $50,000 because the 1% drop over last month has allowed her to purchase more.

Great News Elizabeth - I think there will be many that do the same thing. I am hoping it will be one of the things getting us back on track.

Hey Fred,

I'm trying really hard to find the down side of an interest rate under 5%. I mean, seriously! If there is someone out there sitting on the fence, wanting a lower payment, why wouldn't they make the leap? That being said, I hope that lenders have learned their lesson with the mortgage melt down we're going through now. Mortgages can't be handed out like candy at the Christmas parade. If you want a low interest rate, then not only should you have to qualify with reasonable standards, you darn well better be able to pay it back.

So, unless I'm overlooking some sort of catastrophic problem, this may be one way to give the housing market a shot in the arm.

Fred it certainly would be a great step forward if the rates went to 4.5% but at the same time, they have got to get the people back to work..The jobs crisis will make the housing still hurt unless we can get these people back to work

It will be interesting if the job losses could offset this. I think if the job losses were not so exaggerated, this could fix the economy. My fear it is a little too late.

Carol - I love that attitude. What could be bad about paying less for a home loan? I also agree that people should actually be able to make their payments to get a loan.

Dona - This is one of those vicious cycles. Selling more houses will get more people back to work. Getting more money into the economy will get more people back to work. We just lost some more jobs in Eugene/Springfield and it hurts every time.

Jim - Government is always re-active, never pro-active. We have an interesting time still ahead.

Jeff - Is there something about satire you don't understand? I was making a joke big guy! No matter what the rate, there will be people that want it lower before they commit. Personally, I will take every bit of help I can get in this market.

As for the H4H, who (between you and me) was right? They have already made changes and it still isn't working. But that is another blog argument, isn't it? Chill guy, chill!

Fred - I think Jeff is feeling a little challenged - and trust me Jeff and I did not start out on the right foot - we are now friends - Jeff - stop it - this is Fred's post - and you seem to be over riding it - behave you know better - love ya both

DEC

2008

Golly, Thesa, I am not after his business, just his fame. LOL. Love you too. And really love your post.

I don't get why some people are so against the 4.5% interest rate drop because they view it as a short term solution that will have negative affects down the line yet at the same time they are in favor of programs like DPA or loans for people with a 550 credit score.

Jeff - I have to say that rates at 4.5% would be awesome. Rates at 3% would be incredible. I am just a low rate whore, what can I say?

Michelle - I do like low rates and am not afraid to say so. Give me low rates! DPAs are very useful products but should be given to people that can show they are responsible. Often times, this is best shown through credit score, not always, but often.

DEC

As always, late to all the good parties but couldn't resist throwing in my two cents. I don't think that 4.5% will jump start the purchase market when the difference in payment on a $100,000 loan on a 30 year term at 5.5% is only about $61.10 more expensive than if the rate were 4.5%. If would certainly jump start a refinance boom but I don't think that is what is being proposed. I, personally, would make a ton of money if it applied to refinances but don't see how that would help the broader economy.

In my most humble opinion, I think if the Fed wants to get involved in the real estate market, the money would be better spent lending it to seasoned property investors who are about the only ones who understand taking advantage of the lower real estate prices. That woudl cure the inventory propbelm MUCH quicker than lowering the rates for primary residences.

Heck Beth, if you had come sooner, you might have missed some of the comments. I don't know if the 4.5% rate will jumpstart the market or now, but I do know that it could generate the kind of interest I would like to see. As far as seasoned investors, I am afraid that some of them helped in the collapse as they walked away from their very little down investment properties. Investment financing has become substantially harder to do with higher down payments, more restrictive cash flow requirements and substantially higher rates. Could be interesting to see what happens in this arena. And, as for a $100k loan, even with this market, that is about half to a third of the minimum sales price.

Take a look at Michelle Chamberlain (not related) for some great comparisons to what this reduction can mean over time. I think she hit is on the head.

DEC

In Nashville area they are at 4.75 Conv so 4.5 isn't far, buyers need to be buying now, home prices are down, and interest rates, what a perfect situation.

Doris - I can't quote an interest rate without a bunch of disclosures, but you are right. Thanks for passing this information on.

DEC

We need some positive input in the media! All I have read and heard lately is doom and gloom - 4.5% would be good for the media, although I've heard it is only on new homes.

Well, you may have heard it is only for purchases, but I had 4.5% 30 year fixed interest rate available this morning for well qualified borrowers of 4.5%/4.662%APR* for either a purchase or a no cash out refinance. Not quite as good this afternoon but close. What will tomorrow bring?

Conventionals loan are $200,000 purchase or no cash out refinance (non manufactured home) with 20% down. Loan amount is $160,000. Credit score of 740 or higher.

*Rates and terms subject to change without notice. Maximum loan amounts vary by state, county, and property type . Subject to review of credit and/or collateral; not all applicants will qualify for financing. It is important to make an informed decision when selecting and using a loan product; make sure to compare loan types when making a financing decision. OR License #ML-4832

I told you I had to do a lot of disclosure stuff to quote a rate.

DEC

I have clients that we just finished negotiating contract on a home for them today, their interest rate they locked in Tuesday, 4 7/8's, VA loan. I think gov't needs to stay out of the market. I heard on the radio today that re-fi's are up over 100% vs, last December. Let the market do it's thing. Right now I am helping buyers negotiate some FANTASTIC deals. With every loser there is a winner and right now my buyers are buying homes at unheard of prices with CHEAP money.

DEC

Market forces are what is needed today Scott. Thanks for bringing that up.

JAN

I haven't had a qualified buyer come in for a while now. Only cash purchases. I am afraid that even with amazing low rates, buyers won't qualify because of job cut backs, especially here in Oregon...

FEB

Could it be that they (the government, lenders) are going to be putting people back into houses they really cant afford. Low down payment, lower payment due to interest rate great. But...Bigger house equals bigger up keep and bigger value so the property taxes will be higher as well as utilities. I'm all for a lower interest rate I just hope the home buyers use a little self-control this time around.

FEB

I'm hoping it's true. It will let people refinance who are in their homes now and hopefully get some buyers off the fence!

FEB

Lisa - I don't believe that putting people into homes they can't afford is what this is all about. It is to make homes more affordable and get people that can afford a home to buy one and to help people that are having difficulty with their current payment get a lower one. That, to me, is a win-win situation.

Christianne - It is true. Been there once, may get there again.

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