Mortgages at 4% More Myth than Reality

February 6, 2009

Finance

Federal Home Loan Bank Board Building

Federal Home Loan Bank Board Building

Yesterday I wrote about the possible problems of getting a 5% loan. On Wednesday I started to hear about another plan. Maybe you may have heard all the buzz about Republicans wanting a 4% fixed mortgage rate for mortgages. You can read or listen to a good overview of the whole story on NPR. It’s an interesting idea. Let’s take a look at it a little more closely.

Don’t Count On 4% Mortgages…and Here’s Why

Honestly, I don’t think it is going to happen. It’s a HUGE undertaking that will be wildly expensive, and hard to implement, despite what the idea’s proponents are saying. And, you still need Wall Street‘s buy-in. The investments that will make it possible have to get sold, and investors are just too skittish on mortgages right now to go anywhere near dumping the kind of money that would be required to make this system work.

Likely a False Hope That Can Cause Problems

I don’t think I can speak for all mortgage professionals, but for most of us, when news like this comes out, it creates false hope and false anticipation, like when they were talking about 4.5% a couple of months ago. We either get calls saying something like, “Hey, I heard there’s gonna be 4% mortgages, and I want one” or a prospective

client says “Well, I’m gonna¬†wait for now, cuz I think rates will be down near 4% soon.” This is sad and often counter productive?they may be passing on a 5% rate, only to have the rates go up, and the best we can do for them is 5.75%.

Like a lot of government ideas, it’s well-intentioned, but ill-fated.

Agree? Disagree? Let me know in the comments area below. I’d love to hear your thoughts.

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About Brad Walbrun

Brad Walbrun grew up in northeastern Wisconsin, moving to Chicagoland over a decade ago, and never to return, although he remains an avid Packer fan. He is married, with 3 children, living in Schaumburg. Brad's passions are fitness, MMA, and mortgages. He has been in the mortgage industry since before the refi boom, for almost 10 years now. You can reach Brad at (847) 975-4440 or bradwalbrun@hotmail.com.

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6 Responses to “Mortgages at 4% More Myth than Reality”

  1. Ryan Shoemaker Says:

    Couldn’t agree more. One cost estimate was $300 Billion to $1 Trillion, reading between the lines…the Governments knows it would cost a lot of money, they’re just not sure how much. This would be in addition to all other bailout and stimulus money issued and to be issued.

    Last night the Senate voted down the Republican plan to lower rates 62-35. So this may be off the table for now anyway.

    For consumers, there are several factors pointing to stable to possible lower rates ahead, but there are several factors against as well. Do risk loosing the savings you can achieve now in the hopes of another $20 or $20 savings “if” rates go lower.

  2. Bob Saypol Says:

    Can’t disagree more. Government now controls Fannie and Freddie. Can set rates and make loans affordable. Eliminates billions in toxic mortgages and frees up capital in borrowers’ monthly payments to stimulate the economy. Tell me what 4% loans won’t go bad that won’t go bad over 6%?

  3. Kathryn Hardeman Says:

    What I think is nuts – FNMA/FHLMC – now the government are INCREASING pricing overlays BUT talk about lowering the interest rate. If in deed they are able to lower to 4.5% if you start the new credit score, LTV, and program type over lays the rate won’t be 4.5%.

    Well, I guess it makes all politicians Republican and Democrats alike look good to “lower” rates and never explain the overlay pricing.

  4. Elizabeth Says:

    I completely agree with you! I know the media and Main Street would like to simplify it, “We are the government and we are here to help”, it isn’t as simple as the government waiving their magic wand and making rates what they want! There are so many variables that come into play when it comes to mortgage rates.
    I believe it is nearly impossible for rates to go down further and this is why. The fed funds rate is 0%; I think we would all agree that that it isn’t likely the fed will cut rates from 0%. So you would be asking private banks to take a lower margin in one of the riskiest real estate markets in history! The banks aren’t making money; they are not going to take more risk for less money.
    The reward for the government to take on the task of to rigging rates to 4% wouldn?t be great. It would help a few people that need it but, the bottom line is it doesn’t matter for majority of defaulting borrowers whether their rate is 4% or 6%, if they can’t afford it at 6%, they can’t afford it at 4%! Keep in mind many of these defaulting loans unfortunately the borrowers are unemployed, or so underwater on their property value that they are walking away even if they could make the payments.
    One other aspect of this is “traditionally” mortgage rates are tied to the bond market. I think most know the simple supply and demand rule. So apply the following: Obama passes a $1 Trillion stimulus/bailout package. We don?t have the money obviously, so they sell bonds. Who wants to buy those bonds? Not many, the demand is very low!
    Those that are purchasing our bonds, such as China, are doing it right now because they have to, not because they want to. Many argue that China is going to stop purchasing our bonds and we would be stuck. I agree, if that happened we would be in some trouble to say the least! But, I personally think China has to continue, at least for the time being because we do make up such a large portion of their economy with our purchase of their exports. But, as we sit and debate, yesterdays battles, China is quietly preparing for the day they won?t need to rely so heavily on us. I am not saying that this is going to be tomorrow, or that they will ever not need our export business.
    But, China is beginning to grow and consume their own goods at a rapid rate, which means they don?t necessarily need as much of our export business.
    As we have a growing and surmounting supply of debt and bonds. The government is currently purchasing them. As a result rates have been artificially kept stable.
    In my eyes I would take the 5%-6% and move on with my life. For all we know the bond market is going to be the next bubble to burst. For every month you sit and wait for that 4% to refinance, you are missing out on a month?s savings that you can have at 5-5.5%. So if you are passing by on a savings of $200 a month to wait for 4% because it would be $300/mo. and you have already waited 6 months. What is your breakeven on that? While you are waiting, you may end up missing the boat all together???

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