Posted by Mike Selvaggio in Blog on March 26th, 2009 at 12:59 PM
Under 5%, Mortgages May Be Near The Bottom
REAL ESTATE MARCH 20, 2009
By JAMES R. HAGERTY
The Federal Reserve is going to extraordinary lengths to push down long-term interest rates, including
home-mortgage rates. But those hoping mortgage rates will fall sharply from current levels, already
historically low, may be disappointed.
Mortgage firms Thursday were quoting rates averaging 4.75% on 30-year fixed-rate mortgages, according to
Zillow.com, a real-estate information service. That is down from more than 5% two days ago and about 6% in
mid-November. But further big declines will be hard to achieve, partly because the mortgage-lending market
has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders
have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give
deeper bargains to consumers.
Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest
of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.
Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst
at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.
The Fed began driving mortgage rates down in late November when it announced plans to buy as much as
$500 billion of mortgage securities this year. On Wednesday, the Fed expanded that program, saying it will
spend as much as $1.25 trillion on such securities in 2009. That is enough to provide funding for more than
half of all home-mortgage loans likely to be made in the U.S. this year.
The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing
affects mortgage rates.
By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been
below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and
5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week,
Under 5%, Mortgages May Be Near The Bottom - WSJ.com Page 1 of 3
http://online.wsj.com/article/SB123750531250489895.html 3/20/2009
according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.
One reason mortgage rates often tick back up after a decline is that a rush of people seeking to refinance
quickly causes backlogs at lenders, which frequently don't have enough employees to process all of the
applications.
"If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on
price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.
The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but
also wants the banks to make profits on loans so they can return to financial health.
Many of the small mortgage banks that remain are struggling. Mortgage banks, often small, family-owned
companies, aren't licensed to take deposits and so lack that source of money for their loans. Instead, they
typically borrow money for short periods from so-called warehouse lenders. They use this short-term credit
to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger
banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.
But this warehouse credit is much harder to obtain than it was a year or two ago because many of the big
banks and Wall Street firms that used to provide it have exited that business.
Despite these constraints, the Fed's action is "going to be a plus" for the housing market, says Thomas
Lawler, an economist in Leesburg, Va. Lower rates make it more likely that home prices will hit bottom in
many parts of the country later this year, Mr. Lawler says. The recovery, though, is likely to be gradual, partly
because rising unemployment reduces housing demand.
Christopher J. Mayer, a real-estate professor at Columbia Business School in New York, says the Fed's moves
to cut rates are "helping to put a floor under the housing market." But he worries that the Fed could face huge
losses on the mortgage securities if inflation fears eventually push interest rates much higher.
Still, the consumers who need these low rates the most aren't likely to get much help. Many people can't
qualify for these low rates because their credit scores aren't high enough or they can't afford a down payment
of 20% or more on a home purchase. Such people will be socked with fees that can drive up their housing
costs considerably. Banks also have become far pickier about appraisals and are nixing many purchases as a
result.
Others can't qualify for a refinancing because they owe far more on their homes than the estimated current
market values. Fannie Mae and Freddie Mac have new refinancing programs that will let some borrowers
refinance into lower rates even if they owe as much as 105% of the home value, but only for current loans
owned or guaranteed by Fannie or Freddie.
Write to James R. Hagerty at bob.hagerty@wsj.com
Printed in The Wall Street Journal, page C1
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