Bankers’ group cites Fed’s bailout of Fannie and Freddie for plummeting rates, with refinancing leading the way.

Mortgage applications more than doubled last week, a mortgage bankers’ group said Wednesday, as government bailouts led to sinking interest rates that made refinancing especially more attractive.

In the weekly report, the Market Composite Index – the association’s measure of mortgage loan application volume – surged 112.1% on a seasonally adjusted basis from the week earlier.

On an unadjusted basis, the index increased 51.4% from the previous week; it was down 21.9% from a year earlier, the report said. Results included an adjustment to account for the Thanksgiving holiday.

Rates plummeted following the Fed’s announcement that it would buy debt and mortgage-backed securities from mortgage finance companies Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), according to Orawin Velz, associate vice president of economic forecasting, in a statement.

“Many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound,” Velz said.

The Mortgage Bankers Association said 30-year fixed-rate mortgages fell to 5.47% this week. That’s was down from 5.99% last week.

Rates on 15-year fixed-rate mortgages fell to 5.13% from 5.78%, the report said. The rate on a one-year adjustable-rate mortgage declined to 6.61% from 6.87%.
Refinancing

While the application statistics were high, “this is more a refinance story than a purchase story,” said Mike Larson, real estate and interest rate analyst at Weiss Research.

The report’s Refinance Index increased 203.3% to 3802.8 from the previous week, and the seasonally adjusted Purchase Index increased 37.4%.

“While purchasing a home is a big commitment, refinancing is often a no-brainer,” Larson said. “You may be less inclined to go buy a house in this weak economy. Refinancing will go forward if the gains can hold.”

In the short-term, the Fed “did manage to get quite a bit of bang for their buck,” Larson said. “Most things they’ve done so far have improved some credit spreads slightly, but you didn’t see the effect on Main Street. Now, these are big numbers – the biggest we’ve ever seen.”

Today’s rates are lower because lenders’ standards are tighter, Larson said, so many buyers applying may not have the equity they need for approval. As a result, more applications “might end up in the circular file rather than the closing tables,” he said.

Still, Larson expected the Fed’s actions will result in more staying power and success, giving stressed homeowners a bit of breathing room.

“The Fed gave us an early Christmas gift,” he said.

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Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

The increased demand for mortgage-backed securities would prompt mortgage rates to drop. That, in turn, would enable homeowners to refinance into lower-cost loans and make it cheaper for potential homebuyers to get into the market.

Spokeswomen from Treasury and the Federal Housing Finance Agency, which oversees Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), declined to comment.

Last week’s Fed move drove mortgage rates down to 5.5%, from 6.06% a week earlier. The Fed said on Nov. 26 that it would purchase up to $500 billion in mortgage-backed securities from Fannie, Freddie and Ginnie Mae, and that it would buy another $100 billion in direct debt issued by those firms.

Mortgage applications more than doubled as a result, the Mortgage Bankers Association said Wednesday. Much of the activity stemmed from homeowners looking to refinance.

Industry groups have been pressuring President-elect Barack Obama and lawmakers to lend a helping hand to the housing market. The National Association of Realtors, for instance, has called for Treasury to buy mortgage-backed securities.

Meanwhile, a coalition of industry groups have banded together under the “Fix Housing First” banner to call for measures including tax credits of up to $22,000 and the creation of a 30-year mortgage, carrying rates as low as 2.99%.

Experts see both pros and cons

Experts, however, had mixed views on how much a new Treasury initiative would help homeowners and the economy. Some felt lower rates would help stabilize the housing market by bringing in new buyers and would give those who refinance more money to spend.

“If it gets people buying homes and spending, it will help reverse the economy and get us out of this recession,” said Scott Talbot, senior vice president of the Financial Services Roundtable, which is pushing the measure.

While it takes time to entice new buyers into the market, low rates accelerate that process, said Greg McBride, senior financial analyst at Bankrate.com.

“It is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes,” he said.

But others questioned whether rates would remain low and, even if they did, only a narrow slice of credit-worthy borrowers would benefit.

Rates are already inching up, hitting 5.75% on Wednesday, said Keith Gumbinger, vice president of HSH Associates. Several government attempts to lower mortgage rates this year have failed to have a lasting effect.

Also, the proposal would do little to help troubled borrowers who have fallen behind on their payments, have no equity in their homes or have lost their jobs. With credit standards still high, these homeowners would not be able to refinance and take advantage of the lower rates, he said.

Finally, super-low rates could keep private investors out of the mortgage-backed securities market, forcing the government to remain the primary buyer of such investments, Gumbinger said. Rates have not fallen below 5.37% in more than 45 years.

“I can’t imagine there will be a significantly active marketplace of people who want to buy at these low rates,” he said.

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Does anyone really think this will help much if unemployment is up near 8%? How exactly are people going to continue paying thier new lower rate mortage if they don’t have a bloddy JOB!? Also I’ve been hearing that GoodO’L SUPER RICH and Ultimately ignorant Paulsen isn’t allowing people with exsisting mortages to refinance to this lower 4.5%. Only people whom are purchasing a new home can use it! That shit!

Reducing mortgage rates to a historically low 4.5% may entice some home buyers out of the shadows, but it won’t be enough to really spur housing sales, experts said.

Only a week after the Federal Reserve unveiled a $600 billion plan to reduce mortgage rates, the Treasury Department is considering adding to the effort to lower rates even more. Both moves are intended to get more buyers into the market in hopes of stabilizing home prices and reviving the economy.

While Treasury officials are keeping mum about the latest proposal, lobbyists said Thursday it is aimed at reducing rates to 4.5% only for people buying homes. Those looking to refinance would not qualify.

There’s no doubt, experts say, that the government needs to provide incentives to home buyers.

Until now, all efforts were focused on addressing the record number of mortgage delinquencies. This should remain the priority, experts say, but it should be coupled with increasing demand for homes.

Adjusting mortgage rates, however, will only go so far in getting prospective home buyers into the market, experts said. Potential buyers remain spooked by falling home prices and rising unemployment. And even those who want to buy cannot find loans with reasonable downpayments and terms.

“The problem is not interest rates,” said Kenneth Rosen, chair of the Fisher Center for Real Estate at University of California, Berkeley. “It’s the availability of credit.”

And, of course, there’s still the issue of stemming foreclosures. The Bush administration has been loathe to mandate widespread loan modifications. Instead, it is opting to chip away at the problem by adjusting loans held by Fannie Mae and Freddie Mac and by asking banks to expand their programs.

But even federal officials acknowledge the economy won’t recover until the tidal wave of foreclosures ends. Federal Reserve Chairman Ben Bernanke Thursday said the government must do more to help struggling homeowners, possibly by buying delinquent mortgages and refinancing them to more affordable terms.
Treasury plan in the works

Lobbyists are ratcheting up pressure on federal officials to do more to entice home buyers into the market. Various proposals have been floated, but lowering mortgage rates is among the more popular.

One of the more vocal industry groups, the National Association of Realtors, met with top Treasury officials last month to outline a plan to stabilize home prices through lower mortgage rates.

While details remain sketchy, its proposal calls for Treasury to subsidize rates so home buyers pay 4.5% for a 30-year fixed-rate mortgage. It would be similar to a homebuyer paying points — a percentage of a home’s value — in return for a lower rate, but the government would foot the bill.

The plan would cost $50 billion, said Lawrence Yun, the group’s chief economist.

Lowering rates to 4.5% — about a percentage point below today’s rate — would spur 500,000 home sales over the next year, he said. That would put a big dent in the supply of 4.6 million homes on the market. Right now, there is a 10-month supply of homes for sale, three to four months more than in normal conditions.

A 4.5% mortgage rate would prompt many people to buy, even if they fear home prices will continue to fall and the economy to weaken, he said. Rates have not fallen below 5.37% for 45 years.

A wave of purchases should stabilize home values, which, in turn, will help the economy to turn around.

Last week’s action by the Fed, which prompted a half-percentage point drop in rates, sent home buyers’ mortgage applications up 37.4%, according to the Mortgage Bankers Association.

“We need to do something to counter that pessimism,” Yun said. “Doing nothing will exacerbate the problem.”

Lowering rates is among several options the Treasury Department is considering. An announcement could come as early as next week.
More needs to be done

Experts, however, questioned whether buyers would take advantage of lower rates. They criticized government officials for taking a piecemeal approach — with narrow programs unveiled every week — rather than coming up with a comprehensive plan to stabilize the housing market.

“I don’t think they are thinking through what they are doing,” Rosen said.

What’s keeping many home buyers out of the market are stringent lending standards, not interest rates, experts said. As long as credit remains tight and banks require 20% downpayments, many buyers will remain on the sidelines.

Instead, banks should make mortgages available with a 5% or 10% downpayment, Rosen said. And while he doesn’t advocate a return to the “mirror standard” (when borrowers could get money if they simply could fog a mirror), banks should allow more people to qualify for fixed-rate mortgages if they show sufficient income.

The government could also provide more incentives to home buyers. Instituting a federal tax credit at closing to help cover costs would appeal to many purchasers, said James Gaines, research economist with the Real Estate Center at Texas A&M University. A $7,500 credit approved by Congress this summer — which is really a loan since it must be paid back — isn’t working.

“It hasn’t done any good,” Gaines said. “Make it a real credit for home purchases.”

Another option is to provide incentives for investors to buy properties and turn them into rentals, he said. This could be done with various tax incentives, such as eliminating capital gains tax on homes owned for more than five years.

Other experts said a mortgage-rate reduction could work, but only if it were done on a temporary basis. That would prompt people to take advantage of the lower rates while they last, said Edward Leamer, director of the UCLA Anderson Forecast, a quarterly economic review.

As the economy continues to weaken, however, some economists say the answer to the housing crisis lies in stabilizing the job market. As more people lose their incomes, more fall behind in their mortgages and lose their homes. This trend will accelerate the number of foreclosures and keep prices in a downward spiral.

If people fear for their jobs, or even worse, have no job, they will not make big-ticket purchases like a home, said Christian Menegatti, lead analyst for economic research firm RGE Monitor. That’s why the government should consider an economic stimulus package that will help keep both home values and employment from declining.

“Potential homebuyers may not be in the condition to buy a home no matter what because of a job loss or a drop in income,” he said.

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