Mortgage rates fell abruptly Monday, a day after the federal government announced that it was taking control of home lending giants Fannie Mae and Freddie Mac.
Rates dropped about a quarter of a percentage point early Monday morning, and had fallen roughly another quarter of a percent my midafternoon. That brought the 30-year, fixed-rate mortgage down to around 6 percent, its lowest in five months.
Economists, bankers and mortgage brokers had expected mortgage rates to drop, but not as much as half a percentage point. In times of volatility, rates can plunge and then rapidly bounce back.
Fannie Mae and Freddie Mac don't lend directly to consumers. They buy mortgages from lenders, supplying those lenders with money to extend yet more home loans. A halt in this flow of money, even if it lasted but a day, would cause havoc in the global financial system. The federal government's takeover prevents such a financial catastrophe.
"The good news for the consumer is that money will still continue to flow, provided you have the ability to qualify," says Jim Sahnger, a mortgage broker with Palm Beach Financial Network in Stuart, Fla.
That two-part message was echoed by other mortgage bankers:
- Home loans will continue to be available, at rates that are lower than they were last week.
- And lending standards remain strict compared with a year ago.
Bankrate.com surveys mortgage rates every Wednesday. Last week, the 30-year fixed averaged 6.55 percent. Monday afternoon, it was around 6 percent. Economists and industry insiders were skeptical that mortgage rates would remain that low in coming days.
Dean Baker, an economist with the Center for Economic and Policy Research, a think tank in Washington, D.C., predicted Sunday that mortgage rates would fall about one-quarter of a percentage point. "It's something," he said. "It's not going to make a huge difference."
MBS buying spree
Mortgage rates fell because investors went on a buying spree Monday for mortgage-backed securities. That caused the prices for these bond-like financial instruments to rise -- and when bond prices rise, yields fall. Mortgage rates followed yields downward.
Mortgage-backed securities found willing buyers because they now are backed by the U.S. Treasury. They are seen as very safe investments now, with attractive yields. Plus, investors have been reassured that the Treasury will buy mortgage-backed securities in the future, so investors don't have to worry about getting stuck with a pile of bonds that no one wants.
Tough standards remain
The takeover of Fannie Mae and Freddie Mac is inherently political. Taxpayers ultimately will pay the tab if the transaction goes bad. That's why lending standards won't be loosened.
Fannie Mae and Freddie Mac, along with the mortgage insurance companies, have been tightening mortgage lending standards all year. They have raised down payment requirements, hiked fees and increased requirements for credit scores. It's harder to get a home loan than it was nine months ago. The federal government will not ease up.