With worries about Fannie Mae and Freddie Mac looming over the banking industry, the best bet for homebuyers now is probably to lock in a mortgage rate while the scenario plays itself out.
Industry analysts say evaluating which way mortgage rates will trend over the long term will be tricky because of all the unknowns regarding Fannie and Freddie, the two mortgage giants whose capital standing was called into question last week, setting off a market frenzy.
That's why it makes sense now to play it safe and grab current rates while you still can. A 30-year fixed was going for 6.09 percent Monday, according to Bankrate.com.
"It is my recommendation that as soon as you basically know that you have found a property or are approved for a loan you should go ahead and lock in," says Arnold Martin, president of Absolute Lending and Mortgage in Fayetteville, Ga. "Right now you have a much better chance of closing that loan if it is locked. If that loan is not locked a lender has much greater opportunity to say, 'I'm sorry this is no longer going to be available.' You may have to go out and buy a whole new loan."
Mortgage rates took a slight dip Monday following an explosive weekend in which the government said it would make a variety of measures available to back up the mortgage debtFannie and Freddie have on their books.
But whether that drop holds is dependent on an array of factors, the most important being the fundamental strength of the two lenders going forward. Should Fannie and Freddie falter and the government be forced to go out and raise money, most likely through Treasury bonds, that would pressure rates upward and the government probably would have to pay higher yields to get investors to bite on the bonds.
Similarly, if Fannie and Freddie go out and raise money on their own they too would be forced to pay bondholders a premium that also would push up rates.
If, on the other hand, the two companies are as solvent as Washington politicians say they are, rates probably would hold level. With the Federal Reserve in at most a holding plan on its key lending rate, there would be little incentive for rates to fall significantly.
"In the longer term the real question is how the bond market greets this news once they've had the chance to digest it a little bit," says Mike Larson, bank analyst for Money & Markets online newsletter. "It's never been harder to get a handle on where mortgage rates are going to go."
Indeed, investors greeted the Fannie-Freddie mood initially with a broad wave of approval but then grew increasingly leery as the day progressed. Worries over the banking sector in the months ahead tempered a fast upsurge in stocks off the opening bell, and investors seemed to be betting on more trouble ahead.
Combined with continued economic unrest regarding inflation and unemployment, the state of mortgages remains murky.
"Even if there's a temporary calm in the credit markets, bond traders are going to sit back and say, 'What about the underlying fundamentals?' " Larson says. "The reality is what the Treasury and Fed did is the best of bad options. Until something can be done about longer-term problems ... I don't see anything over the longer-term bringing mortgage rates down."
Martin said the problems could become especially acute for jumbo loans, the mortgages above $417,000 outside the purview of Fannie and Freddie that usually are issued at higher rates and could be even harder to come by as banks protect their capital standing.
That heightens the importance of locking in now, he said.
"If you're not locked in you won't have a leg to stand on" if conditions change, he said. "To me it's not worth the gamble. Rates may not go down."