4.5% interest rates should clear the matter up

Under the plans-that-don't-make-a-lot-of-sense category (which is bulging to overflow these days) ... handing out 4.5% interest rates to people who may not really need them. Reports out late Wednesday included this on CNNMoney.com:

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

More from the Associated Press on latimes.com about the proposal, which would drop rates by about a percentage point:

"The goal is [to] drive mortgage rates so low that home prices not only stop falling but begin to rebound," said Greg McBride, senior financial analyst at Bankrate.com.

Though the plan, if enacted, would help anybody looking to buy or sell a home or refinance out of an expensive mortgage, it may not help those whose credit is so damaged that banks don't want to lend to them.

"It may change the number of borrowers seeking loans, but it won't change the qualifications for who gets those loans," McBride said.

OK. So remind me again how this makes things better.

--Lauren Beale

Thoughts? Comments?

Comments

[D]

OK. So remind me again how this makes things better.

You're learning how to write this blog Lauren.

Good for you.

[Tim]

As I understand this program, the 4.5% rate would only be for new purchase not a refi. I am correct, then how does this help a current homeowner with a high mortgage payment? It looks like this is a ploy for an investor class to buy homes with govt subsidized loans. I sure hope I am wrong.

[Laker]

Lauren,
It will get "things" better as it will help inflate home prices back beyond fundamentals. It i will be good for states as they will collect more taxes, it will make RE agent rich again, it will provide home equity once again so people can pull cash out of the house and buy the boat, LCD, go to vacations, buy another house...
Only problem is that loaf of bread would be 10$ and gallon of gas $15. And also, we could never retire as who could afford the property taxes on $2 million dollar house for plain Joe and Jane home owner.

Why don't they artificially give 0% loans and finish this thing once and for all. Letting the market set the interest rate is bad. Communism is good!

[Steve]

This is basicallly the core solution to address the housing debacle. Paulson is such a moron, a trillion dolllars wasted and this is the only strategy that help housing prices

[WEJ]

It seems like the powers that be are convinced that cheap money is the answer to all the world's problems - not addressing the fundamental problems.

The attitude of policy makers reminds me of an unattractive woman who things that using more and more make-up will make her more attractive, or an unattractive man that thinks that another thick layer of cologne will make him more appealing.

[k2polo]

I am a realtor in the desert area. This is so incredibly dumb it's ridiculous! The problem is NOT interest rates, it is a climbing unemployment rate and wages that do not support an "entry-level home" When will we get it? Housing prices will continue to fall until jobs/wages are stabilized, not the other way around..stop the insanity!!!

[J]

Yeah Lauren, you're nearly as negative as the commentors now. Well done!

[SoCalJim]

Another attempt by the govt to support bloated housing. Just goes to show how bad housing is when the govt has to resort to articifically low interest rates.

Running the calcualtor, for a 700k house w/20% down, a difference between 4.5% and 5.5% is about $390. If someone is deciding whether to buy a house based on saving that amount of money per month, well then, there is nothing I can say to those people. Those people either have bigger problems to deal with and will lose their house anyway or are smart enough to know that the govt is just goating people to buy by reducing the interest rate in a very bad housing market with interest rate savings that really are not that significant.

Current projections are for LA prices to go down 18%. For a 700k house, even assuming less than 18% decline, that is still 75k loss. Nothing like losing 50% of your down payment in 1 yr just for buying a low interest rate. Kind of like buying certain stocks in this bear market - you thought $5 was a good price, but now perspective changes when the stock is sitting at $2...

The fundamental problems are prices and affordability. Always have been and will continue to be.

What happens 3 yrs from now when rates are much higher? They will go up eventually. Just a fact. You can't keep 4.5% forever.

Govt is just delaying the correction, thereby making the correction last longer and have a more significant negative impact and dragging out this recession. This is bad news for anyone.

Further, this govt monkey business will negatively impact the next run up in prices since there is so much artificial support. Thus, these govt monkeys are affecting not only people looking to buy by making it harder to buy a house, but also affecting people who already own.

And do people honestly see house prices going up signficiantly wiht rising interest rates when they do start rising? They will go up and there will be even larger problems at hand.

Bottom line: further correction necessary. Fiddling with it only delays the correction or makes things worse for buyers and home owners. Sad, but true.

Don't count on your home for retirement. People who do are in bad financial shape and should readjust their thinking and their assets.

[dclogang]

"OK. So remind me again how this makes things better."

Lauren, you took the words right out of my mouth!

Um.... have those guys not learned a THING and.. oh, yea!
ARE THEY OUT OF THEIR MINDS?

[Tim K.]

It is unlikely that even if the gov't offered 0% loans that housing prices will appreciate enough to make a difference. Or even that they will appreciate much at all.

The reason we had such a high housing appreciation rate was not that people could afford the homes with crazy financing - they couldn't. They were buying assuming that housing ONLY goes up, and goes up *fast*, i.e. 20% per year. That's the only reason you overextend yourself for an asset - if you believe you can flip it to some greater fool.

Nobody wanted to actually *buy* these houses, they wanted to *resell* these houses.

Also, when people believe that interest rates are artificially low (via gov't intervention) they realize that the next buyer will not necessarily have this benefit, and so the next buyer won't be able to afford a higher price.

You only buy a $10 loaf of bread if you think you can sell it to someone else for $15. If you think the loaf will still be $10 next week, you'll take a better gamble elsewhere, like on Ford or GM stocks, which look like they might have as good a chance of doubling your money if the gov't bails them out in the next 2 months.

[LA-renter]

J,

What is "being negative"?

even someone, who feels that our government should be constructively sorting out the current mess, is exasperated with the shortsightedness of and pandering by the powers that be in Congress and the administration.

Maybe the new media give a false/negative impression. It appears to me that the sum of government intervention has been the conversion of a private loss into a public loss.

What about drawing back our dependence on debt and financial nonsense?

[T.Simpson]

Not wanting to invite abuse, but doesn't it make the MOST sense to extend this rate to Re-Fi's of existing (particularly sub-prime and interest only loans) only or at least, first? If I'm reading it
right, the root of this problem was caused (partially) by unscruplous brokers who misled buyers and/or stupid buyers who don't read their documents and realize that in 3 or 5 or 10 years their ARM/interst only, etc loan will re-set and payments will go up by 30-75%.

Most of those people CAN afford to make their original payments forever (if they don't lose their jobs in the economic downturn) which is probably about what payments on a 30-year fixed @4.5%. That seems to be the logic behind the suggestion to me.

Also, how about lowering the fees on these Re-fis? How about a 3 way split: consumer pays 1/3 the usual rate, govt pays 1/3 the fees, and the broker/lender/appraisers take a 33% discount? And please NO POINTS. This is going to make a LOT of business for broker/lender/appraisers (particularly compared to their business the last 2 months), so they should be willing to take a cut in the fees, making up for it with volume.

This should be STEP 1 in this whole thing (and should have been done with the first $125 billion of the bail-out). Is it to late for that now? STEP #2 should have been a (public, tranparent, auditable) negative auction of mortgage-based securities--they were headed for this originally and it would have been the best way to get these out of financial institutions' portfolios--Paulson opted instead to just give bags of money to his buddies, behind closed doors.

Oops, here I go, sounding like a typical argumentative, name-calling blog-poster. Sorry. I'll stop here.

[Ace]

You can get a 30 year loan for less than 5.5% today. This isn't going to help with afford ability. Even if you borrow the max of $417k, your payments will only be $200 less per month.

How many people are only $200 a month away from buying a home? Not many.

[MyLessThanPrimeBeef]

I don't believe the cure for constipation is to say to ourselves, 'well, since we don't use the pipe (an euphemism) no more, let's seal it up. Let's freeze it up.'

I believe the cure for consipation is to get bowle movements, to flush out the, uh, I don't want to be too graphic here...debris.

[fezco]

Thanks Lauren..... Your blogging is much improved. Even at 4.5%, the affordability index indicates that housing is still prohibitavely expensive. I do think that this will prop up the sellers who are in denial. Paulson needs the correction to correct dammit!

[Jason]

I love this plan. I sold my house back in June of 2007 and have been patiently renting while waiting to get back into the market. There are many like me waiting to jump.

Why reward those who have made poor financial choices? Reward the smart ones and the economy will improve.

People...look up moral hazard on wiki. Dont reward those who make mistakes.

[SoCalRob]

A lower interest rate makes purchases more attractive to people on the sidelines waiting to enter the market. I don't think that this will make a difference in the big picture and, as such, is rightly criticzed by everyone here. However, as somone who has been saving up a down payment now for 5+ years (and is really, really ready to have a house despite the difficult market), it does make me wonder if we're close enough to the bottom that I should think more seriously now about taking the plunge (pun intended).

[IQ200]

No one really gets it yet, and they probably won't.

1st, devalue all homes by 25% across the board. Sure, people in short term purchasing will lose a little, but if they are forced to hold on to their homes for a while, then things will stabilize. Speculators do not deserve to win on this one. So we stabilize, new home buyers will be able to buy. sellers of the long term will sell for a reduced profit, but will again buy lower, so it is win win for almost everyone. People who bought ARM loans are suckers and deserve to lose and learn from the mistake.

You can not stick your hand in a fire and expect not to get burned.

[Drew]

If people are paying even a little less per month on housing, that means there's more money available to save/invest and/or pump into/prop up the consumer economy.

So I can at least understand the rationale behind this proposal, even if it does not address other underlying problems with the economy.

But at this point, I don't think we can expect our "free market economy" to fix itself.

[E]

A 4.5% 30 year fixed will help the Option-ARM holders how exactly?

There is still a HUGE difference between those payments.

[Michael P]

I saw the speculation alone of the potential deal cost the US over $4 billion in home sales this week:
http://www.vamortgagecenter.com/blog/2008/12/04/4-billion-in-lost-home-sales/

[RahRahGrl]

It's psychology, people. It's not about whether 4.5% saves us any more money, it's about whether the banks get enough cash inflow to start things moving again. Clearly 5.5% hasn't done that, so maybe lower rates will.

None of this, from the very beginning, has had anything to do with affordability.

[CeW]

The following is a big part of the problem-or at least why I think i will never get to buy, 4.5% is irrelevant:
Saw a house I have been folowing for a while on the MLS today.
From Property Shark
788 N. Catalina Ave., Pasadena
Sold in August for $351k-I could manage this price
Buyer is West Coast Inv Group LLC
OK they do a nice job fixing it, but it is now on market for $529-well out of my price range.
So the sharks are still in the market, buying the down at heel houses in desirable neighborhood- and essentially making sure that the kind of house I might like to buy and renovate, as money and time allow, is never available

[Drew]

RahRahGrl posts: "None of this, from the very beginning, has had anything to do with affordability."

And you know what? Very little of it ever will, other than the consumer calculus of: "Can I afford this month's payment?"

If housing is affordable using that metric, it will be bought and/or rented. If not, it won't.

This business of "houses cannot be priced at higher than 3x median income" and "housing payments cannot be more than 28% of income" may be sound financial advice -- but do not take in the realities of consumer market decisions that include a willingness to pay 50% or more of income on housing, something that many people do.

Also, when looking at income vs. affordability, one needs to look at incomes of people buying into a community, not necessarily incomes of people already living there.

If a community is populated mostly by retirees who have paid off their mortgages, or people who bought 10-15-20 years ago and have lower incomes and very low relative housing payments, income levels will be low. However, housing prices may be many multiples higher than median incomes because people with higher incomes who are buying into the community are willing to set the market price higher than what the "fundamentals" insist they should be.

For instance, in Santa Monica, many houses are owned by people with relatively low incomes who bought a long time ago. New buyers with higher incomes who are buying into the community today will be more than happy to pay more than 3-4x the current median income of Santa Monica for a median property -- so prices will increase faster than median incomes until all the properties have been sold at market rates. At that point, and only then, will median prices be 3-4x higher than median incomes.

The median price to median income ratio is therefore a less important metric than many people think.

[sfvrealestate]

This will cover re-fi's as long as there is equity in a home. At the risk of stating the obvious, even saving a couple hundred dollars a month on your mortgage is kind of a good thing, no?

Interest rates have been between 5.5% and 6.5% for about the last ten years now. The question should be: "Why are high interest rates a good thing?" and "How does this make things worse?"