$800 Billion Move Should Lower Mortgage Rates

By RUTH SAMUELSON

Updated 11:33 AM EST, Fri, Nov 28, 2008

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From the Washington City Paper blog Housing Complex

Does this man look stressed to you?

Treasury Secretary Henry Paulson announced the government’s latest move involving hundreds of billions of dollars. Up to $800 billion will be used to buy up “$500 billion of securities backed by mortgages, which are guaranteed by Fannie Mae and Freddie Mac. The Fed will also buy up to $100 billion of debt in Fannie Mae and Freddie Mac, which should let them more easily expand their lending,” according to the Washington Post. This move should significantly lower interest rates:

Estimates varied on how much the Fed action will lower interest rates for ordinary home buyers. Jim Vogel, an analyst with FTN Financial, estimated that the Fed’s facility could lower mortgage rates to between 5.5 percent and 5.75 percent for 30-year, fixed home loans. Recently rates have been hovering over 6 percent and have been nearly as high as 6.75. Other analysts expected a steeper drop, to roughly 5 percent.

And here’s a rather tidy explanation of why the usual adjustments aren’t cutting it these days:

In a normal recession, the central bank cuts the federal funds rate, a bank lending rate, to encourage growth. Two things are different this time. For one, the downturn appears likely to be more severe than recent recessions. So although the Fed has already cut the federal funds rate to 1 percent — and may well cut it to zero percent by January — it may not be enough.

Moreover, because this downturn is the result of a profound financial crisis that has caused lending to dry up, those interest rate cuts have not passed through to consumers. Since January, the Fed has cut the rate from 4.25 percent to 1 percent, yet the rate on a 30-year, fixed-rate mortgage has barely changed.

Photo from the Department of the Treasury.