The mortgage industry has experienced slow application activity over the past several months, but that jogging pace may turn into a sprint as mortgage rates fell to historical lows recently. On November 25, the government announced some major credit stimulation initiatives in a bold move to bolster the depressed housing and mortgage markets. On the news, home loan rates tumbled by one-half percent, a move seldom encountered in the mortgage business. Three major components came together to create the sharp drop. First, the Treasury announced that they would now guarantee Fannie Mae and Freddie Mac debt and purchase up to $100 billion of that debt, thereby bolstering investor attraction to the safety of their issued bonds. Secondly, the Treasury announced that it would purchase up to $500 Billion of Fannie, Freddie, and Ginnie securities, creating much needed liquidity in the mortgage markets. Finally, Treasury yields dropped in a major one-day move, almost one-quarter percent on the 10-Year Treasury bond.

The result of this perfect storm of financial news was a one-half percentage point drop in mortgage rates and a potential beginning for stabilization in housing. Historically low mortgage rates may be just the stimulus needed to drive potential homebuyers off the fence to begin the offering process. After the government announcement, many lenders were offering par rates in the 5.5 percent range for 30-year fixed rate mortgages. Home loans at this price may be a hard deal to pass up for those refinancing loans and purchasing homes, especially in light of the roller coaster ride that mortgage rates have taken so far this year.

On the refinancing front, although interest rates are low, home prices continue to deteriorate across the country. The National Association of Realtors recently announced that sales of existing homes fell by 3.1 percent in October, and the median home sales price plunged 11.3 percent from a year ago to $183,000. On this news, it’s important to keep in mind that a homeowner’s qualified refinance home loan interest rate may not be as low as advertised offer rates, if their loan-to-value (LTV) ratio exceeds 80 percent. So, it’s a good idea for those considering a mortgage refinance to get a handle on the value of their home, before they start shopping rates. The spread appears to be tightening for higher LTV home loan scenarios, but those refinancing over 90 percent of their home’s value will most likely get the best deal with an FHA refinance.

As for the rate outlook ahead, many feel that the current low mortgage rates will continue for a while. Whether they decline even further is anyone’s guess, but a leveling in home prices could be just the medicine needed for further rate dips.

By: Jim Bisnett