Last week, the Federal Reserve announced it would buy $500 billion in mortgage backed securities from Fannie Mae, Freddie Mac a Ginnie Mae. Response was immediate as mortgage rates dropped.
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If there is an increase demand to b buy mortgage backed securities, this would prompt mortgage rates to go lower and it would allow homeowners to refinance immediately and take advantage of lower payments.
Last week’s Fed announcement drove mortgage rates down to 5.5% from 6.06%. Mortgage applications more than doubled as of result and more homeowners are still looking to refinance as of now.
However, Fed current aim is to exclude homeowners who want to simply refinance, but provide this plan only to new homebuyers. Criticism sparked quickly over this plan and Fed is currently considering more options.
For one, only borrowers with good credit would be able to take advantage of this programs and lenders qualification guidelines has changed and credit score of at least 720 is needed to get a loan and thus refinance.
Borrowers whose credit score is bad would not be able to take advantage of this program and that is where Fed is stuck. As long as banks loan qualifications remain frozen, Fed only choice is to allow such program made available anyone who can qualify.
Primary buyer of new program for mortgage rates would be government and with low interest rates Fed is able to allow bring more homebuyers into market, thus slowly let housing market correct itself as more buyers’ means higher demand and slowly real estate prices would increase.
There are pros and cons to this plan as of right now and questions remain how it will all work. Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market.
Low rates might be the answer to current real estate crises as low rates accelerate the process of quicker recovery, which is needed in current time. However; the plan does not specify for how long the rates would remain low and if only those who act quickly can take advantage of low rates.
This proposal will do little to none for those who are behind on their payments, have no equity in their homes or have no income due to job cuts. Credit standards still remain high and troubled homeowners will not be able to take advantage of this situation as of yet.
For some homeowners recession is proving a good thing as many are taking advantage of low mortgage rates. Just three years ago mortgage rates were around 6.65% and today you can get 5.5% which results in great savings over life of the loan.
If this plan comes into affect it will bring an enormous advantage to current homebuyers.
Mortgage rates has not fallen below 5.37% in more than 45 years so refinancing boom and new purchase boom may be coming soon.
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