The silver lining? Lower mortgage rates

Acquiring a mortgage loan

TEXT OF INTERVIEW

Tess Vigeland: So this whole Fannie and Freddie thing... There's got to be a silver lining, right?

You're paying billions as a taxpayer but have you noticed that it just got cheaper to buy a house? Rates dropped under 6 percent this week thanks to that big bailout. That's the best showing since April and it's prompted lots of folks to lock-in on their home purchases.

Our friend Greg McBride of bankrate.com is here with some details. Welcome back to the show.

Greg McBride: Thank you Tess.

Vigeland: So what we are seeing now in the wake of the Fannie and Freddie takeover is a drop in mortgage interest rates. Was this expected?

McBride: It was expected and here's why: what happened in recent months is that mortgage rates, which typically take their cues from the movements in Treasury yields, had actually seperated somewhat from Treasuries and what resulted was even though Treasury yields had declined to very low levels, the same thing had not happened with mortgage rates. Since the government takeover, all of a sudden, even with very little movement in Treasury yields, you saw a very sharp drop in mortgage rates as that spread contacted noticeably just on the news that the government had taken over Fannie Mae and Freddie Mac.

Vigeland: Yet when we talk about people refinancing or choosing this time to go ahead and jump into the housing market, you still have to get that loan in the first place, right, before you can get a good interest rate on it and the credit crunch is not over?

McBride: The credit crunch is not over. It's 13 months and counting. The Fannie/Freddie takeover may prove to be the beginning of the end of the credit crunch or not, but it's going to be several months before we can make that determination.

Vigeland: So just because we have lower mortgage interest rates doesn't mean that it's necessarily going to be easy to get a loan?

McBride: The rules of the game are good credit, proof of income and money for a down payment. That is not going to change, particularly now that the taxpayer is on the hook. What will change, I suspect, in the weeks and months ahead is that lenders will be a little less reluctant to lend because now, rather than Fannie and Freddie buying fewer loans because they're focused on sustaining themselves, you now have the Treasury standing behind them and in a position to buy loans from lenders, so I think you'll see lenders a little more willing to make that loan to a qualified borrower and some of that hesitancy we've seen in recent months begin to dissipate.

Vigeland: I wonder, there's obviously a lot more to buying a home than just the interest rate that you're going to get. Could we, in the wake of this Fannie/Freddie action, see a shift in fees that might make these lower rates kind of a moot point?

McBride: Never say never, but what we've seen with mortgage rates is enough of a positive that you're going to see a big benefit to borrowers in the long run. Part of the contributor to the higher mortgage rates that we had seen recently were fees that Fannie and Freddie were stacking on to loans they were buying or guaranteeing and so the contraction of mortgage rates relative to benchmark Treasuries is reflecting the fact that no longer are Fannie and Freddie going to be allowed to flounder for their own survival at the expense of the mortgage borrower. With the government taking them over, some of the fees and the reduced buying activity that's contributed to higher mortgage rates has fallen away. So the benefit in mortgage rates may well offset any changes that you see in lender fees going forward.

Vigeland: Alright Greg, well here's the $64,000 question: Is now a good time to buy into the housing market?

McBride: If you're a well-qualified borrower and you're financially positioned there are a lot of bargains out there. No doubt about it, you're getting a much better value now because of falling home prices and you have the tailwind of low mortgage rates behind you. But mortgage rates alone are not a reason to take the plunge into home ownership. Buying a home is a lot like getting married: you have to be in it for the long haul and prepare for that commitment. If it means taking another six or twelve months to pay down debt, save more money and boost your credit score, go ahead and do that. Prices aren't going to run away from you in the interim. If you're well positioned and able to take that plunge now then the low mortgage rates add some additional buying power.

Vigeland: Alright. Greg McBride at bankrate.com. Thanks so much for your time.

McBride: Thanks for having me.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.

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