Will Lower Mortgage Rates Solve the Financial Crisis?

What can lower mortgage rates really do for Wall Street's current financial issues?

October 6, 2008

By: Drew Sygit

CMPS, CMLO, CALO, MBA

BLOOMFIELD, MI - Today's almost 400 point drop in the Dow show's the financial markets don't really have a lot of confidence in the Fed's bailout package.   This is compounded by the financial issues now popping up in Europe.  All this turmoil has many people calling for alternate plans to address the crisis on Wall Street.  One of the most common ideas is having the Federal government do something to lower mortgage rates to keep people in their homes and get buyers off the sidelines and buying homes again.

 Despite this popular sentiment, it's really unclear what lower rates will do to solve the housing problem.  According to FreddieMac (http://www.freddiemac.com/pmms/docs/30yr_pmmsmnth.xls), rates at the beginning of this year were under 6% for a 30 year fixed mortgage.  So, overall rates are at historical lows already.

 In reality, falling housing prices are making homes more affordable than even a drastic decrease in rates would.  Consider:

 $150k, 30 year fixed mortgage @ 6.5%, leads to a payment of $948.10/month.

That same mortgage at 5.5% would have a payment of $851.68

 The 1% difference in the interest rate (huge!) only leads to a difference in the monthly payment of $96.42.

 How much could a buyer finance at a rate of 6.5% to get a payment of $851.68/month?  The amount financed would be $134,746. 

 That's a difference in price of just over $15k or 10%. 

Most places in Michigan have already seen at least a 10% drop in housing prices in the last two years!

 So, why are so many calling for lower mortgage rates to solve the housing crisis?  More than likely it's related to consumer confidence and sentiment. 

The housing boom and mortgage frenzy of the last decade has conditioned many consumers to focus solely on mortgage rates when making a house buying decision.  This is still probably the case, in spite of the recent foreclosure epidemic proving the folly of that short-sighted thinking!  As the numbers above show, the interest rate is just one of the variables to be considered when buying a home, or refinancing for that matter.

 Maybe President Lincoln was wrong.  Maybe you can, "Fool all of the people, all of the time"?  We should all hope that is not the case and that consumers realize the value opportunity they have in this market & start buying houses

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Drew Sygit is President of The Lending Edge and holds mortgage industry designations CMPS, CMLO, CALO and has an MBA.  He's spoken for HUD, has written numerous articles and is a mortgage industry advocate for loan originator licensing and consumer education.  He can be reached at 248-310-3739 or dsygit@TheLendingEdge.com.