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Treasury Weighs Action on Mortgage Rates
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Any efforts by the Treasury to lower rates on new mortgages would work in concert with a Federal Reserve plan announced last week to buy $500 billion worth of existing mortgage-backed securities issued by Fannie Mae and Freddie Mac, and $100 billion worth of those companies' debt.
The Fed was pleasantly surprised that 30-year fixed mortgage rates fell by as much as three-quarters of a percentage point in anticipation of their program. Homeowners rushed to refinance. Cheaper monthly payments may bolster consumer spending, the most important component of U.S. economic activity.
News of the Treasury plan spread quickly through the markets. Shares of home builders rose. At Long & Foster, the Washington area's largest real estate brokerage, top brass informed agents that they should gear up for increased demand from potential buyers.
"This is going to be a short-term windfall that everybody needs to jump on," said Dave Stevens, the firm's president and chief operating officer and a former Freddie Mac official. The move by the Treasury certainly would mean "interest rates will drop," he added.
But it is unclear whether lower mortgage rates will spark home buying, which is a weightier decision for ordinary people than refinancing a loan.
There are also questions about how much the Treasury would spend to buy down the mortgage rate. One industry source said another idea being pushed by trade groups calls for the Treasury to spend $50 billion of its $700 billion financial rescue package to reduce the fees, or points, that home buyers pay when they want a lower rate for a mortgage.
Yesterday, the average rate on a 30-year fixed-rate mortgage increased slightly to 5.75 percent yesterday, up from 5.54 the previous day, said Keith Gumbinger, a vice president at research firm HSH Associates.
"What's not known is the timing of the purchasing of the mortgage-backed securities and how quickly money will be pumped into the marketplace and that matters as to how low the mortgage rates will go," Gumbinger said.
Staff writer Neil Irwin contributed to this report.
