We Need More Than 4.5 Percent Rate To Save Housing

There seems to be some renewed energy behind a housing proposal leaked early last week. It’s the plan to have the Treasury buy home loans from Fannie and Freddie if the loans are given at 4.5 percent interest rates. The Realtors are pushing the plan, desperate for any kind of home-buying incentive.

Apparently the incoming administration’s economic team is considering the idea, but wants to go further because the proposal wouldn’t really do much to help the foreclosure crisis. I realize I’ve already argued the point that a 4.5 percent interest rate is not going to be the full fix the housing market needs, so I won’t go there again, but we have to, once again, look at this from yet another updated perspective.

Mortgage rates have been dropping all week. They’re now somewhere just below 5 percent, in fact pushing toward that 4.5 on their own. The mortgage brokers I’m talking to say that has opened the floodgates on refis, and in fact the Mortgage Bankers Association weekly applications survey shows a big surge in refis even last week. But the brokers say it’s all refis, no new purchases.


Does that mean that borrowers in danger of foreclosure are suddenly getting saved? I would ever so eruditely surmise: nope. I recently got a look at a report on residential mortgage backed securities from a company that specializes in assessing risk.

Among the many astonishing charts was one that shows the top 10 home value declines for subprime loans with losses over the past year. States with some of the highest foreclosure rates, like Michigan, California, Ohio and Massachusetts, showed the steepest value declines in homes, which is of course not surprising given that foreclosure sales drive all home prices down.

So the bulk of the borrowers in trouble have not only no equity in their homes, but really severe negative equity, like 30-50 percent less than the purchase price. Those borrowers can’t refi, no matter how low the interest rates. And while 4.5 percent interest rate loans may help spur buying, it’s not going to help the troubled borrowers to sell, because they won’t be able to get enough in the sale to pay off the mortgage. Short sales are a possibility, but they are tricky and can take a long time to work out with the bank.

I’m not saying 4.5 percent won’t help, but there definitely needs to be more in Santa’s bag if he’s going to find anyone living at the bottom of the chimney.

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