Since the Fed announced a plan to purchase $500 billion of mortgage-backed securities on November 25, mortgage rates have moved progressively lower, and the trend continued last week. Conforming fixed-rate mortgage rates dropped to levels last seen in 2003. Weak Retail Sales data and low inflation figures released during the week also supported the move lower.
As the government strives to offset the current weakness in the economy, its actions have exerted a much stronger than usual influence on mortgage rates. Programs to purchase mortgage-backed securities and to provide capital to financial institutions have been favorable for mortgage rates, while a bill introduced in Congress last week could have the opposite effect if passed. The bill would permit bankruptcy judges to modify troubled mortgages by reducing the principal and payments. The goal would be to help prevent foreclosures, which is a worthy objective. However, opponents of the plan are concerned that investors may require higher mortgage rates to compensate for the increased risk that loan contract terms may be changed. At this point, it's not certain when the bill will come up for a vote.
We do need a plan to help people in foreclosure but what is the best plan? That is the multi-billion dollar question for another day.
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