Thursday, March 26, 2009

Mortgage Rates Drop to Record Low 4.85%

WASHINGTON (AP) -- Rates on 30-year mortgages plunged this week to the lowest level on record after the Federal Reserve launched a new effort to assist the staggering U.S. housing market. Mortgage finance giant Freddie Mac said Thursday that average rates on 30-year fixed-rate mortgages dropped to 4.85% this week, from 4.98% last week. It was the lowest in the history of Freddie Mac's survey, which dates back to 1971 (see chart above). The previous record low of 4.96% was set in the week of Jan. 15.

MP: It could be a lot worse. It was a lot worse in the 1981-1982 recession when mortgage rates peaked at about 18.5% in October 1981. The difference in monthly payments on a $100,000 mortgage at 18.5% ($1548) and a mortgage at today's 4.85% ($528) is more than $1,000 per month!

7 Comments:

At 3/26/2009 2:26 PM, Anonymous sprewell said...

C'mon, you know that's not a fair comparison, inflation was through the roof back then. You have to subtract inflation to figure out the real mortgage rate, which is higher today than it has been this decade because of the recent dropoff in inflation. I'm as much a free marketer as anyone but I prefer that statistics aren't used to mislead.

 
At 3/26/2009 3:16 PM, Anonymous PollyannaPerry said...

Good luck getting a loan these days. A friend in the business stated to me that the rejection rate is running around 50%. Those who do get a loan must qualify under conforming guidelines, have a substantial down payment, and pass a very conservative appraisal. This rate will help anyone with significant equity and stable finances refinance, beyond that, there's nothing to see here.

 
At 3/26/2009 3:59 PM, Blogger ExtremeHobo said...

Man I really want to buy a house right now

 
At 3/27/2009 2:58 AM, Blogger 1 said...

"Good luck getting a loan these days. A friend in the business stated to me that the rejection rate is running around 50%"...

Hmmm, I'm wondering if this is a regional situation or something that is starting to appear everywhere in the country?

Over at the WSJ there's this bit of a symposium that was an interesting read...

Did the Fed Cause the Housing Bubble?

 
At 3/27/2009 7:32 AM, Blogger MattJ said...

Isn't this another case of borrowing short and lending long at a historically low rate? If inflation kicks in, and bond rates move up to historic levels, aren't all these mortgages setting up banks and Fannie/Freddie for massive losses?

 
At 3/27/2009 5:21 PM, Anonymous Anonymous said...

MattJ, help me with your comment. As long as they collect the 4.85% over the long haul, how does that become a "loss", albeit much less than future rates down the road. They won't lend it now for less than they acquired it. Don't they only actually "lose" on a default?

 
At 3/29/2009 11:56 AM, Blogger MattJ said...

Anonymous- The problem is the source of funding for the lender. In classic banking, I bank takes in deposits, paying a small fee, and lends out leveraged up somewhat. The '3-6-3' model of banking is the bank pays out 3% interest on deposits, lends out at 6%, and heads to the golf course at 3pm. What happened in the seventies is that the combination of high inflation and money markets meant that individuals could earn 10% from money markets rather than 3% from savings accounts. The result was that S&L's lost their deposit base, and to compete had to offer much higher interest rates for deposits, higher in fact than what they were earning on their loans. Mortgage holders, on the other hand, stopped paying off their loans early, as they could not refinance at a competitive rate.

The question now is, what is the funding source for the current loans? People are taking out 30 year mortgages at historic low rates. I believe that Fanny and Freddy are buying most of these mortgages, and securitizing them. If they are selling 30 year agency bonds to provide the money to buy the mortgages, that would be the model you suggest. If, however, they are selling shorter term agency bonds, or even worse the federal government is buying them with money from short term treasuries, then when those bonds/notes mature, Fanny/Freddy will need to roll them over. I am very skeptical that Fanny/Freddy will be able to sell bonds at less than the current 30 year mortgage rate for the lifetime of these loans.

 

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