Mortgage Drops – Possibilities and Outcomes

Mortgage Drops

Federal Reserve Chairman Ben Bernanke requested the government to ramp up efforts to stop soaring home foreclosures.  The foreclosures taking place today are feeding into USA ’s deep economic troubles.

 

Bernanke’s speech came as Freddie Mac reported that interest rates on 30-year fixed-rate mortgages slid 0.44 percentage points – the biggest weekly drop in 27 years.

 

Average rates on 30-year fixed-rate mortgages dropped to 5.53% this week; down from 5.97% last week, and the lowest since the week of Jan. 24, at 5.48%.

 

Are more drops on the way?  They may be if the government launches an industry-backed plan to lower the rate on a 30-year mortgage to 4.5% by spending hundreds of billions to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac.

 

Possibilities:

q     Treasury Secretary Henry Paulson will ask Congress for the second $350 billion installment of the $700 billion financial bailout package to bankroll the effort.

q     The Federal Reserve plans to purchase up to $600 billion of mortgage-backed securities and other debt issued by Fannie and Freddie and the Federal Home Loan Banks.

 

The Outcomes:

q     Consumers are taking advantage of the situation.

q     New mortgage applications more than doubled last week, according to the Mortgage Bankers Association’s weekly survey released Wednesday.

q     Refinance volume more than tripled, making up nearly 70% of all applications.

q     Rates on other types of mortgages also fell, according to Freddie Mac’s survey.

§         15-year, fixed-rate mortgages, rates averaged 5.53%, down from 5.74% last week.

§         5-year, adjustable-rate mortgages dropped to 5.77%, compared with 5.86%.

§         1-year, adjustable-rate mortgages dropped to 5.02%, from 5.18%.

 

Bernake’s plan outlines options to reduce foreclosures that are categorized as “preventable”:

Option 1:  ease the terms of a government program called “Hope for Homeowners,” which lets distressed homeowners refinance into more affordable, federally insured mortgages if the lender writes down the amount owed on the mortgage and pays an upfront insurance premium.

Option 2:  Suggests Congress lower lender’s upfront insurance premium as well as reducing the interest rate borrowers pay. To bring down this interest rate, Treasury could buy Ginnie Mae securities, which fund the mortgage program, or Congress could decide to subsidize the rate.

Option 3:  ease the terms of a loan-modification plan put forward by the Federal Deposit Insurance Corp. that seeks to make monthly mortgage payments more affordable. The FDIC put this plan into effect at IndyMac Bank, a large savings and loan that failed earlier this year, and has used it to modify mortgages at other financial institutions.  The IndyMac plan, allows struggling home borrowers pay interest rates of about 3% for five years. Rates are reduced so that borrowers aren’t paying more than 38% of their pretax income on housing.  

Bernanke suggested this threshold could be lowered to perhaps 31% of income, with the government sharing some of the cost.

Option 4:  Have the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the Hope for Homeowners or another government program that insures home mortgages.

Other options include a broader push for lenders to forgive a portion of the home loan for certain borrowers, and other permanent modifications over the longer term so that people don’t fall back into distress again.