Tom Vanderwell

WASHINGTON (MarketWatch) - The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.

The plan would employ Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1% lower than current rates.

The measure is under consideration as part of the Treasury Department’s continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported.

As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.

Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.

Treasury may set mortgage rates at 4.5% to boost sales - MarketWatch.

Okay, not to rain on everyone’s parade, but let’s take a logical look at the numbers and the statistics behind it.

1. What’s the only way possible that I’m aware of to lower mortgage rates? By raising the price of mortgage backed securities which lowers the rates on them. Lower rates on mortgage backed securities equals lower mortgage rates.
2. How do you increase the price of mortgage backed securities? The only way that happens is by increasing the demand for them.
3. How do you increase the demand for them? Have the government step in and buy a HUGE (I’m talking many many many zeroes!) amount of mortgage backed securities off of Fannie and Freddie.
4. How is the US government going to come up with that money? All joking about printing presses aside, in reality, they are going to have to borrow the money.
5. How do they borrow the money? By issuing a LOT of US Treasury bonds to finance their purchase of mortgage backed securities.

So, what happens with the price of US Treasuries if suddenly there’s another $1 Trillion on the market?

• Demand stays the same.
• Supply goes way up because the government is flooding the market with new debt
• Price goes down because the supply exceeds demand.
  
• Rates go up.
  

I was talking to another blogger this afternoon and he said it quite well. We have a supply problem. There is simply too much debt floating out there to work the way that Hank and Bernie want it to.

So far, the market has shown that they would rather earn less (frankly close to zero) and invest in US Treasuries than they would invest in mortgage backed securities. Given the history of Fannie and Freddie recently (how many billions did they lose in the 3rd quarter?) I’m not sure anyone can blame them. Can you?

So, we’ll have to see how the details pan out, but I’m not optimistic that what the plan is proposing will actually work. It might actually backfire and due to the increases in government borrowings have a reverse effect and keep mortgage rates higher.

Stay tuned, it’s going to be an interesting ride!

Tom Vanderwell

Mortgage Rates have been updated.

Reactions and Recommendations:

The stock market is staging a bit of a rally today. Why? Because Ford said they expect to make a profit in 2011. Once again, like last week, the market is reacting to emotion and, in this case, saying, “Oh good, the auto industry is in okay shape!”

Has anything of substance changed between yesterday and today? Nothing that would have an impact on the overall markets. So don’t expect this rally to continue for too long either. Until we see a rally that has a solid basis on fundamental facts, it’s going to ride the roller coaster of hope and fear and greed and despair.

Recommendation - due to the volatility, I’m recommending that you lock all loans. There is the possibilty that rates could go down, but I believe the upside risk is greater than the downside potential.

Have a good day and check back often. I’ll be writing more as news breaks and issues warrant discussion!

Tom Vanderwell

Mortgage Rates have been updated.

They have dropped because Secretary of the Treasury Paulson has decided to start buying mortgage backed securities. The idea is that they will increase the likelihood that rates will drop further.

Will they drop?
Will anyone else want to buy mortgage backed securities?
How long will the rates stay low?
How low will they go?
How many people will take advantage of the lower rates and refinance? How many people have enough equity to be able to refinance?
How many people will take advantage of the rates and go buy a new house?

I don't know the answer to any of these questions, so my recommendation is to take the savings and lock in all loans......

Tom Vanderwell