Are mortgage rates going to go down to 4.5%?

According to reports, the Treasury is considering a plan to reduce mortgage interest rates to 4.5%. No reports have come from the treasury directly so there are a few different scenarios that have been reported.

One of these says that the Treasury will purchase mortgage-backed securities (MBS) directly from Fannie Mae and Freddie Mac as well as mortgage backed by the FHA. By purchasing these MBS the Treasury will add liquidity to the mortgage market which will lower interest rates. The Federal Reserve (The Fed) announced a similar program last week which almost immediately lowered mortgage rates from over 6% to about 5.5%. The hope would be that this plan would increase liquidity in the market and increase demand across the economy for MBS, this lower the raising the price and lower the yield (Rate) on these MBS. The other scenario says that the Treasury will purchase mortgages directly from lenders as long as they have a rate of 4.5% on them.

Since there is no official statement from the Treasury there are no guarantees as to what, if anything, will be done. But, the markets have reacted positively to the fact that the Treasury, along with the Fed, are trying to improve environment for the mortgage and housing sectors.

I hear it would cost billions of dollars. And, I have heard that the government will make a profit. Which is true?

Since there is no actual policy these are all just guesses. If the Treasury offered mortgages at 4.5%, many people feel they will realize a profit since the Treasury can borrow funds at about 2.7%. This would give them a profit of 1.8% on this historically low rate. Other see this as a huge cost to the government to entice the lenders to offer mortgages at 4.5% when the market is currently 1% higher. Nobody can know for sure until there is an actual policy.

When can we expect these rates?

Many people feel that these rumors or “leaks” from the Treasury are an attempt to get a feel of how well or poorly a program like this would be received by the markets, Congress, the public, and the incoming Obama administration. While a lot of people think a program is in the works, the final look of that program is anyone’s guess right now.

I was going to refinance at 5.5%. Should I wait for these lower rates?

You know what they say about "a bird in the hand" . . . If a refinance at 5.5% make sense to you – do it. This program may never materialize. And, while you wait, you are not only spending more money with every payment you make, but rates would also rise to a point where refinancing is no longer a good option. There have been at least three opportunities in 2008 to refinance at rates below 6% and I have many customers that waited too long to make the decision. They have spent thousands more this year than they would have if they had refinanced. Many of them have already applied and locked their rate and are taking the sure bet. But, I still have a few customers that intend to wait for the 4.5% rate to materialize. All I can say to these customers is, “Good luck!”

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