1. In a article written at CNN today it talked about how the treasury is throwing around the idea of lowering 30 year mortgage rates down to 4.5%. If the Treasury Department steps in and does this it does nothing to fix the down turn in the housing market. The amount of homes on the market are not going to decrease.
2. The old saying of “Good Ain’t Cheap And Cheap Ain’t Good” could describe what will happen if this goes through. Remember last time interest rates were lowered. Wasn’t it in 2002 after 9/11? Didn’t Alan Greenspan and the rest of the ass clowns at the Federal Reserve lower rates on things like home equity lines of credit to historical lows to spur the economy. It worked, right? Well it did for about 5 years and look at where we are at now. Is going back to low mortgage rates the answer? No!!
3. I understand their thinking. They think that if their were lower rates it will get people off of the fence who are ready to buy but are waiting for rates to come down. Some people may have been declined on a loan because their debt to income ratio was too high. By lowering the 30 year mortgage rate to 4.5% this will be all the motivation one needs to write up a purchase agreement and get moving. Umm, no. The amount of homes sitting vacant is going to grow because of all the layoffs going in the economy. Foreclosures are still popping up and probably will continue to do so. So who is going to buy all these homes again?
4. The reason people are not buying homes has nothing to do with interest rates. People are not buying homes because real estate values have been dropping by double digit figures every 6 months since late 2007. So what sounds better to the person sitting on the fence. Save 1% on your mortgage rate or 10% off the price of the house? Both do of course but what’s better? Is that a trick question?
5. As an example. Let’s say a couple is planning on buying a $175,000 home. They plan on putting 20% down payment for a loan of $140k. Let’s assume that 30 year interest rates as of 12/5/2008 are at 5.5%. This would give them a payment of $794 principal and interest a month. If they could get the 4.5% interest rate their payment would be $709 a month. That’s $85 less a month in interest. Not that much. To somebody looking at buying that much of a house is not going to slow down their decision. It might (and I mean might) sway them but that’s like not going out to the bar one night a month. If they want that house they are going to buy it regardless of the rate. Let’s take that same couple who is waiting until home prices start averaging home value drops of 2%. Its smart to wait until that time period because nobody offers full price in a down market. You always offer 10% less than what they are asking. For the examples sake let’s say they wait another 6 months and the value of the home drops another 10% like what’s happening here in Michigan. The same home of $175k is now worth $157,500. Putting the 20% down the loan is now $126k. Let’s say 30 year mortgage rates are at 5.5% in 6 months. Their monthly payment would be $715. Only $6 more a month in interest. Some may argue that it makes sense to get off the fence and buy with those numbers. What you don’t think about is where the money’s coming from. Its coming from the Government who just decided to print up a bunch of money and flood the markets again with cheap coin. This causes inflation and a decline in the value of our dollar. Both are a lose/lose scenario. You might say that on paper it makes sense but you will be paying for it in the long run in your taxes and your purchasing power.
6. The problem is not the interest rates, its getting people approved on the loans. Mortgage rates are near historical lows. Mortgage lenders have had to tighten lending restrictions to people without a good credit history or enough income to make their mortgage payment. Nobody deserves to be a home owner. You have to earn it.
7. More mortgage companies will go bankrupt. Sure, in the short run it will be like the good old days of the refi boom where people were calling left and right and begging to do a loan. Most of the housing boom was called the “refi boom” for a reason. People were refinancing because rates were low, not buying. All of the people who have stuck it out at mortgage companies will get rewarded with this quick burst of refi applications, or will they? I can remember before I was shown the door at Quicken Loans that over 90% of my clients had a loan to value over 85% and a 30 year interest rate around 6%. From what I hear from my friends that still work at mortgage companies they don’t allow cash out refinances over 90% LTV anymore. I assume that most of my past clients are around 95% LTV which disqualifies them before you can even get into the mortgage application. Too bad for them.
8. What about the people who can get approved? Now they have a 4.5% interest rate. Do you think they will ever refinance again? They better not. If they do, then their dumb. So now the mortgage company has lost a past client it could do a loan for. So much of the business mortgage companies do is refinances, not purchases. It was just like when I did a second mortgage for one of my favorite clients in Washington. We did 4 loans for her in a matter of a year and a half. She kept taking money out of the equity in her home and then on the last one I told her that we would probably never be able to do a loan for her again because she was (over a year ago) at 100% LTV. She’s probably at 110% LTV now. On to the next client.
9. So with everybody jumping in to get lower interest rates now the margins the banks make on the loan is going to be less. I wonder if it will be enough to cover their losses from the past or be able to hit their estimates on Wall Street.
10. The biggest reason why it won’t help is because the Government is running the show. They want to show all of us that Fannie Mae and Freddie Mac still work. The market clearly shows they make it worse. Its not that I don’t want the economy to get back on track but every time I hear the Directors at the Federal Reserve talk I wonder how such intelligent people could ever think of such idiotic ideas. They should let the market take its own course, lock the doors at the Fed and get out of the way.