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Could mortgage rates hit 2%?

Now that that Federal Reserve is committed to keeping borrowing costs low, might mortgage rates drop even further?

By MSN Money Partner Sep 21, 2012 2:25PM

This post comes from Marilyn Lewis of MSN Money.


Miniature home on sheet of percent signs © Comstock/Getty ImagesMortgage interest rates fell this week, back to the lowest they've ever been. Freddie Mac's weekly survey shows:

  • 30-year, fixed-rate mortgages sold last week averaged 3.49% (borrowers paid an average 0.6 point).
  • 15-year fixed rates averaged 2.77% -- a new all-time low (borrowers paid an average 0.6 point).

This month, the Federal Reserve made a move that should keep the cost of borrowing low for at least another year:

The Fed said last week it would buy $40 billion every month in mortgage-backed securities until the labor market improves substantially. The program, known on Wall Street as "QE3," will likely lower interest rates for mortgages and also help some people refinance their home loans.

So: lower rates, right?

In theory, rates for mortgage buyers and refinancers should drop. Homebuyers and owners are wondering how low rates might go. Could 30-year fixed rate mortgages drop down into 2% territory?


Sadly, you're not going to like the answer. It's looking like you can forget your hopes that the government's $2.75-trillion (so far, since 2008) bond buying spree might also create a little trickle-down for the average Jane and Joe. The anticipated mortgage interest rate drop isn’t happening.


To be fair, the government support is helping lower the price of subprime auto loans.


But even as government subsidies drive down the cost of borrowing for banks to new lows, "the cost of mortgages to borrowers hasn’t fallen anywhere near as much," says The New York Times' DealBook, in an article titled, "How Much Does the Fed’s Plan Really Help Main Street?" Credit card rates, for another example, are stuck. 


HousingWire reaches the same conclusion, quoting Paul Diggle, an economist with Capital Economics, who "doesn't expect the 30-year fixed-rate mortgage to go lower than 3.25%." 


The question is, why? There are a variety of explanations. HousingWire believes the cause is the federal government, which plans to soon raise the fees charged to lenders. The idea is to have loans from government mortgage programs reflect their true cost and allow private mortgages to become more competitive:

The stimulus announced this week might not make mortgages much cheaper. Any drop may be offset by an increase in guarantee fees Fannie Mae and Freddie Mac are set to charge in November. The lender passes those charges on to the homebuyer.

BankRate, too, blames the government fees for consumer mortgage rates' lack of downward momentum.

Mortgage rates reached new lows this week after the Federal Reserve started its bond-buying program. But they could have dropped lower if Fannie Mae and Freddie Mac had not raised mortgage fees.

Financial Times has a different theory. It says banks aren't passing on their lower rates because demand for mortgages has grown so fast that banks can't keep up. With demand so great, there's no need for banks to compete by lowering rates.

"Very little of that (federal stimulus) is likely to make it through immediately to consumers," he said. "There's nothing that will force mortgage originators themselves to lower the rates that they're offering to consumers. Right now they have their hands pretty full in terms of the pipeline and managing paperwork and making loans. These folks are busy. There’s not a bunch of people on long cigarette breaks."

FT continues, "Wells Fargo and JPMorgan, responsible for almost half new loans, are moving thousands of staff to the frontline of mortgage origination but are still struggling to cope, analysts say."

But DealBook counters that Wells Fargo has been well staffed for some time and is perfectly capable of handling the volume of mortgages. DealBook has another explanation: Banks like the new, fatter profit margins.

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

In another article, DealBook concludes that consumer mortgage rates right now should be about 2.83%.

"Put another way, the banks aren’t fully passing on the low rates in the bond market to borrowers. Instead, they are taking bigger gains, and increasing the size of their cut."

Maybe, DealBook implies, the banks have just gotten used to pocketing fatter profits and there's no reason for them to change: 


The banks don’t care because mortgage revenue is ballooning. But it all means that the 2.8% mortgage may never materialize.

More from MSN Money:









if there is no benefit and there wont be any lower rates then WHY write a stupid article
I read the headlines and wonder wow god news and the idiot tells me what I already know

Sep 21, 2012 3:57PM
You could put the rates at 0% and it wouldn't make any difference.  I thought the main stream reported last week home sales were up?  When sales are up why are you thinking about lowering rates?  A lot of untruthfullness in the media these days!  ALOT!
Sep 21, 2012 4:40PM
It could be 0% but if you don't have a job or if your credit was bashed from the last go around you won't qualify anyway. Plus the banks don't want you unless your credit is sterling. It's all just more BS.
Sep 21, 2012 4:35PM
Low rates only make it less expensive for those extremely well qualified buyers who likely do not even need to borrow the money for their purchase...they make more on their investments in stocks and bonds than they pay for their mortgage loan, so it makes financial sense to use  borrowed money.

People who do not have that type of monetary clout are being refused loans to refinance their mortgages after the housing bubble deflated their home values by as much as 45 and 50 percent in the worst case scenarios. Mean while, common Joe, whose miserable 800 square foot home cost him/her $250,000 and is now valued at $140,000 can not get a refinance at these lower rates and are now under water after making payments religiously and on time for ten to twelve years, They saw their $100,000.00 equity disappear.
Some readers will question why in the world would anyone pay $250,000 for such a small home?...maybe a 1500 square foot home in the same geographic area cost $450,000...there is your answer, Some people have a need to be close to certain medical facilities or be located close to an income source and do not want to commute two hours to work and another two hours to get back home through miserable traffic conditions..
I would like to see some regulations made to protect consumers and less regulation protecting banks that practice predatory and selective lending to the extent they are doing now. I am all for requiring responsible borrowing on the part of those who are seeking loans, but these people also pay a high price for the loans they have on their homes. Over the life of their loans they often pay 3 dollars for every dollar they borrowed, I think that the lenders are making more than enough money that they get from the fed at 1/2% and then loan out at 5 1/2 %. How greedy is too greedy?
Sep 21, 2012 4:48PM
So let's take a vote.  Of those who would like to buy a house not refi.  How many have 30K for the downpayment based on a 150k home and  that's not a mansion in any town?  How many have a score better than 750?  Don't have revolving debt, a car loan, college loan, or somethin else that pushes your DTI ratio out of whack?  With the college kids of the past heck 5 years they aren't buying a house anytime soon with college debt, car loan, oh and wait.... no job because our hope and change president just let 1.7 million illegals take those jobs too so that the effective unemployment rate is 10% plus. The bank loan officer might be getting 1000's of apps in but I also have a relative that works for another name brand big bank and the refusal percentage is well...........horrid.
Sep 24, 2012 7:48AM
The sad part is with a credit score of over 800, years of sterling credit, no other debt except the house, and with well over 35% equity in my house it still took 8 weeks to get a loan. I had to jump through more hoops than a circus clown. They all but wanted the size of my underwear when it comes to my personal info and then they treated my like a POW. I hate the mortgage game and I hope to never refi again no matter how low the rate is just because the process is so stinking unfriendly. I can't believe I'm saying this but I'd rather buy a car.
Sep 21, 2012 6:45PM
Trickle down stimulus didn't work with the first 2 and it won't work with this one.  Most all employers small and large are sitting on the sidelines waiting and watching.  Between to major employers one  being BOFA and the other American Airlines another 15k jobs are being terminated soon.  The last recession that truly or officially never ended in part was a combo of alot of things and gas prices was one of them.  We have had 8 or more months with gas prices again hovering at 4 dollars.  Middle America was just starting to regroup from the last cycle of 4 dollar gas.  With gas and groceries at the highest they have ever been it's a matter of time before this recession becomes even deeper.  My feeling is Bernanke and Obama already know that the cliff is here and Bernanke is doing everything in his power to stop the word depression from hitting before the election.
Sep 21, 2012 4:32PM
Between those who have their homes underwater, those who lost their homes by default and now have crappy credit,  a 20% down rquirement, a credit score of at least 750 to get the good rate, and a DTI of less than 35% of income,  and those now that are at poverty level or below,  I highly doubt that there are many getting approved of all those submitting new apps.  I have a 750 plus score, 20% plus down but my DTI was 40% and partly with college loans my kids have I cosigned and the big bank lander told me to pay my 2 cards off to get DTI below 35%.  Geee mr. banker that's why I wanted the cash out in the first place.  The answer why loans aren't going down is because the banks are making a killing trading money with each other at .25% and lowering the mtg rates makes them less.
Sep 21, 2012 4:33PM
Like someone said, it really doesnt matter how far the rates drop...It's the difficulty of even getting a loan. With people losing jobs, getting behind on bills, low credit scores... It will not improve any time soon. The bulk of the bussiness for banks now is people with high FICO scores, thoses are the ones banks are making big money off.
Sep 21, 2012 5:37PM
You will find that most of the profit from this government action will end up in the pockets of banks. I suggest purchasing bank stocks rather than refinancing. The rich get richer and the poor get poorer as always. This is simply a welfare program for the rich.
Sep 21, 2012 3:51PM

another famous obama sleigh of hand deal to buy votes.........he will say see how I'm telling the fed  to buy mortgage bonds to lower mortgage rates so more borrowers can refinance/buy houses, but I'm not telling you that at the same time I'm being sneaky by increasing gov't fees on the mortgage lenders that will effectively negate any rate reduction that might have occured by the bond buying.... 

Sep 21, 2012 7:41PM

While the interest rates continue to drop and the Gov't continues continues to print money, it only will lead to some radical inflation that will very quickly send the economy into the dumper. The country can't continue to  represent an economy that is in good shape but in reality has absolutely no money. Our debt is now into the $100 trillion + mark between Gov't and private debt. And since the Gov't has no money, there is no more money for bailouts .... which will send the economy, employment, inflation, banking into the "BLACK" hole!  The country is bancrupt ....


Can you say Greece or Spain? Can you speak chinese? Better learn quickly!! Thanks Barry .....

Sep 21, 2012 6:02PM
How and the heck can you sell long term money @ 2% without it coming back to bite you on the ****. I smell another bailout years down the road for those holding the paper. Sure everyone would just  love a  2% home loan  but it's all smoke and mirrors. Money has a real cost which is not reflected in the manipulated rates the Fed is producing today. We will all rue the day when the real bill comes due for the Feds and our Governments economic folly.
Sep 21, 2012 5:14PM

so, these trillions of funds the prez has thrown out to the banks are not for the consumer to enjoy but for the banks to continously harbor fat profits just like any other time during the real estate boom.  in spite of the banks own stupidity and greed they get rewarded by the prez.  how about that?  great! 


6 trillions fed into this economy and we,  the american people are still jobless and unable to find jobs.   the banks who took most of us to the cleaners are still profiting taking in fat profit from our own tax funds.  how about that mr. prez?

Sep 24, 2012 10:44AM
Sep 24, 2012 9:47AM

I purchase, renovate and sell several homes a year and I help many buyers obtain loans. Although loans are harder to qualify for, there are programs available even at 600 if you have a down payment and other qualifiers. . You will need to jump through the aforementioned hoops mentioned in some of the other posts. However, the loans are available. Even though I am in the housing business and business would be better if the lending institutions would lend to anyone who submitted an application.    I believe most of the qualifications now being enforced by lending institutions are needed and  I support a stricter lending policy.  It is needed to keep the housing market stable. The foreclosure rates are a testament to the loose lending policies of the past. Not only all of the fraudulent loans which were given on no doc loans, but lending to people who were not stable enough to be responsible for a 30 year loan to begin with. Although it is sad that people get divorced, loose their job or have other life problems. When those times come it is still those peoples responsibility to pay their home loans. In most cases their problems take precedence and they don't feel responsible to pay the commitment they signed up for. Many people will walk away or loose their home and then blame the banks, the government and everyone who is successful for their problems. Many people give up simply because it is easier and they don't want to take responsibility, it is hard to feel sorry for people in that situation. However, in some cases you can't blame folks, they have little choice. I may even do it myself in the right situation.  However, responsibly, those in charge of the lending institutions need to take these possible scenarios into account in deciding a loan. This is why a large portion of your credit score is tied to your length of history, if you have moved recently or changed jobs.   It should take several years to built up your credit score and prove you are reliable enough to pay for a long term commitment.   That is not something that can be proven with a year track record.    It is not good business for a lending institution to give a long term commitment loan to people who do not show enough fortitude and stability and then get stuck with a non performing loan when the customer gets divorced or looses a job or the value of their house goes down.  What would your qualifications be if you were going to lend your personal money?  Would you purposely want to set yourself up to loose money?   A home loan is something you should need to work hard for to obtain. Being awarded one should be regarded as a privilege and an achievement. Not a god given right because you can sign your name on the application.

Sep 21, 2012 8:34PM
Great, people will not be able to afford to save money. Printing more money adds to inflation while interest rates for trying to save goes down. This will only help people go into debt or further into debt. It might cause a short term increase of purchases, but it will be with borrowed money that may or may not be paid off. Interest rates have been to low. There is always a downside when the government jacks around interest rates.
Sep 21, 2012 6:46PM

The consumer should be only paying 2%.  This is another scheme for the banks to rip us off.   The banks couldnt make it when

they were charging 17% plus 6 points in 1980, and 13% in the 1990's.

What is wrong with the screw balls in the government and the Banks.  This is another plan to get the consumer.

Sep 24, 2012 10:51AM
The free money the Federal Reserve loaned to banks was another bailout of the banks through zero interest on taxpayer money(i.e. your money) who used the money to keep interest rates right where they were. The Fed never bothered to attach string to the free loans, passing the savings onto the customers.  So,...what did you expect? Fair play. Level playing field?  The government looking out for you?  If you really think this is an honest play to help homeowners you're doctor needs to change your medications
Sep 21, 2012 4:52PM
no money to be made at 2 %    way do the risk
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