Will tumbling mortgage rates help the economy?

Filed under: Federal Natl Mtge (FNM), Housing, Financial Crisis

Despite cutting the Fed Funds rate from 5.25% to 1% since August 2007, mortgage rates remained stubbornly high. They also remained elevated after the $800 billion bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). It finally looks like the latest plan to spend $600 billion to buy mortgage-backed securities is causing mortgage rates to drop. But are lower mortgage rates good for the economy?

Yesterday’s MBS buyout plan shrunk the rate on a 30 year fixed mortgage from 6.38% to 5.5%. If people can qualify for a refinancing, then the lower rate will save them money — one analyst estimated $200 — on their monthly payments. But given the state of the economy, with over half a million people losing their jobs every month and banks taking extra care to lend only to the most creditworthy, it looks like the ones who need those lower rates the most won’t be able to get them.

With the huge overhang of housing supply from foreclosures and the pain of at least $6 trillion in lost home equity since the real estate market began to tumble, it is unlikely that lower mortgage rates will start a stampede of people into the housing market. But it sure would be bad if the lower rates ended up creating yet another housing bubble. For the time being, the best thing that lower mortgage rates could do is to help people use the extra cash to pay off their other debts.

And eventually it would be helpful if all that extra housing supply got sopped up. That would go a long way to stopping the economic decline.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Will tumbling mortgage rates help the economy? originally appeared on BloggingStocks on Wed, 26 Nov 2008 17:30:00 EST. Please see our terms for use of feeds.

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