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What 4.5% mortgage interest rates mean to the economy

[Jan 13, 2009.]


Federal Reserve targets rates for 4.5%  (see WSJ article)

Mortgage interest rates are targeted to be around 4.5% due to the Federal Reserves aggressive buying of mortgage backed securities.  The Federal Reserve has committed to buying $500 billion in mortgage related bonds in order to drive their yields to their 4.5% target.

Implications of 4.5% mortgage rates

According to Janaki Rao and Bernard Gordon of Morgan Stanley in their report dated January 5, 2009 "We estimate that a decline in 30-year conventional mortgage rates to 4.5% on a sustained basis could increase housing affordability by 20% and thus housing demand by 2.8%, stabilize home prices, and would free up to $22 billion of disposable income (about 0.2%) annually for homeowners through refinancing of existing mortgage."

Who can benefit from refinancing to the low 4.5% interest rates?

The only people who will be able to benefit from the 4.5% mortgage interest rates for a refinance will be people who still have equity in their homes or who are eligible for a streamline - no appraisal- loan product.  Zero home equity will reduce the number of people who will be able to benefit from refinancing into 4.5% mortgage interest rates.  There are several states in the United States who have experienced greater than 20% loss in value, including California, Nevada, Arizona, and Florida.

Refinancing without an appraisal

Right now, the only refinance available without an appraisal is a streamline through the FHA and the VA.  These FHA and VA streamline refinances do not require an appraisal or a credit score if the borrower is not increasing their original loan amount for cash out proceeds.  The streamline product is ONLY available to borrowers who ALREADY have an FHA or a VA loan. 

Extreme need for a conventional streamline refinance product

According to above mentioned Morgan Stanley report, in areas where home values have declined as much as 20%, there is little opportunity to refinance.  "A decline of magnitude 30% or higher from peak to current (values) would effectively remove the entire universe's ability to refinance to zero."

Fannie Mae and Freddie Mac made approximately 5.3 trillion of the mortgages on the books.  None of those people are eligible to refinance without an appraisal.  Until Fannie Mae and Freddie Mac roll out a streamline loan product, the extreme drop in values we have experienced over the last year will prohibit a refinance in many areas of the United States.


About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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