Mortgage Blog

This morning the Federal Reserve and Treasury Department have announced that they will start buying 800 billion worth of bad debt from banks and lenders. This is a significant change from their earlier stance when they wanted to just invest in the banks. Since this announcement banks and lenders have dropped their lending rates drastically. On average, rates for home loans have dropped anywhere from ½ to ¾ percent overnight.

Even though I still do not like the idea of government bailing out or injecting money into private enterprise, this is one act that can have a huge impact on the recovery of our economy. By lowering interest rates for homes, cars and credit cards, etc… banks have created their own boost to the economy. They are betting on the consumer to pull us out of this financial crisis. Lower borrowing costs encourage consumers to purchase homes. When more homes are purchased, the supply of homes for sale decreases. More demand and less supply halts the free fall of home prices. If home equity is stabilized, then homeowners are not as likely to let homes go to foreclosure or short sale.

You may ask if the banks are willing to lend money in abundance now, will this create the same problem we recently had with bad mortgages? The answer is no. The difference now is that banks have tightened their lending standards. Only borrowers with verifiable income and assets and good credit history will qualify. Sub prime loans are essentially non existent, which is the way it should be. When the well qualified borrowers are the only ones able to obtain a home loan you will have less loans going to foreclosure. All of this instills confidence among the banks and lending institutions, allowing them to lend more money to consumers, thus reducing rates even more.

Of course I am somewhat biased and this development will help my industry, so there is probably more hope than the average analyst. It just makes sense to me that this is the one move that could actually help our economy for the long term.

Market Update: 30 year fixed rate mortgages have dropped to an average of 5.5% with 1 point. I expect some volatility in rates in the next few days as banks will be attempting to figure out where to price their loans to make a profit and encourage borrowing.

Don’t be surprised to hear radio ads saying rates have hit 4.75% , this is true for loans with very high closing costs, (points) or shorter terms like a 15 year fixed.