Mortgage rates plunged after the Federal Reserve announced that it would buy up to $500 billion of securitized home loans.
Rates on 30-year, fixed-rate, conforming mortgages fell well below 6 percent after the Fed announced Tuesday morning that it would buy up to a half-trillion dollars' worth of mortgage-backed securities over the next year to year-and-a-half. Bankers and brokers say rates fall as far as 5.25 percent, at least for a while. Last week, the 30-year fixed averaged 6.33 percent in Bankrate's weekly survey.
The rate reduction is exactly what the Fed intended: "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the central bank said in its announcement.
"It's pandemonium around here right now," says Bob Walters, chief economist for Quicken Loans. "This is going to have a major effect on refinancing opportunities and it should absolutely translate into increased home buying."
Two years ago, the average rate on a 30-year fixed was about 6.5 percent. At that rate, the principal and interest on a half-million-dollar loan was $3,160 a month. Now, if someone borrowed $325,000 at 5.5 percent, the monthly principal and interest would be a more affordable $1,845.
The Fed's action helps not only buyers, but also homeowners with adjustable-rate mortgages that want to refinance into fixed-rate loans.
The mortgage and real estate industries look upon the announcement as a gift from Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Jim Sahnger, mortgage broker with Palm Beach Financial Network, in Stuart, Fla., suggests that borrowers apply for loans and lock rates quickly, in case rates rise again or home values continue to fall.
Ryan Kennelly, a mortgage banker for Residential Mortgage Services, Inc., of Bedford, N.H., says the Fed's action is huge for two reasons. "First, with lending institutions getting the much-needed support of the U.S. government, they (lenders) will ease some of their most restrictive lending rules -- opening the door to more consumers to get loans," he says, adding that more qualified borrowers mean more home sales.
Second, Kennelly says, "this news also couldn't be better for current homeowners who want to stay in their homes but can no longer afford the payments due to their adjustable-rate mortgage increasing. By interest rates coming down, combined with lenders easing some of their qualification requirements, more and more homeowners in this situation will be able to refinance."
The Fed's decision to cut mortgage rates won't help people who can't refinance because they owe more than their houses are worth. And people who already are two or three months' behind on their home loans probably won't get much out of it, either, says Dean Baker, economist for the Center for Economic and Policy Research, a Washington think tank.
Baker worries about lack of accountability or transparency: The Fed and the Treasury have not disclosed details about their purchases under the Troubled Asset Relief Program, setting a precedent for secrecy about the Fed's purchases of mortgage debt under the plan announced Tuesday. "We don't know who they're going to be buying bonds from, or how much they'll pay -- or if they'll overpay," Baker says, adding that if the Fed pays a dollar for a security that's worth 20 cents, "that's the same as handing (the seller) 80 cents."
By buying mortgage-backed securities, the Fed will be taking direct action to reduce mortgage rates. That's because mortgage-backed securities behave like bonds. When bond prices rise, their yields fall. A wonkish detour into the behavior of bonds will illustrate this point.
A bond is an IOU. Let's say you lend someone $100 and the borrower gives you a piece of paper, promising to give you $105 a year from now. That paper is a $100 bond with a 5 percent yield. The yield is equivalent to an interest rate. Now assume that the government stepped in and offered to give the borrower a better deal: $102 now in exchange for $105 a year from now. The bond's yield would be roughly 3 percent. That's how the bond's yield gets lower as the price gets higher.
The Fed says it's going to be that buyer who pays a higher price for the bond, causing the yield to drop. As the yields on mortgage-backed securities fall, consumers generally see mortgage rates fall, too.
Mortgage rates fell this week, with adjustable-rate mortgages dropping especially sharply. The average 30-year fixed-rate fell 6 basis points, to 6.33 percent. A basis point is one-hundredth of a percentage point.
The average 15-year fixed -- a popular option for refinancing -- fell 7 basis points, to 6.01 percent. The average jumbo 30-year fixed slid 8 basis points, to 7.62 percent.
Adjustable-rate mortgages fell even more substantially. The one-year adjustable-rate mortgage dropped 16 basis points, to 5.78 percent. The popular 5/1 ARM sank 24 basis points, to 6.18 percent.
(Reach Holden Lewis at editors(at)bankrate.com)
(Distributed by Scripps Howard News Service www.scrippsnews.com)
REAL ESTATE WATCHMust credit bankrate.com
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