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From Lehman Brothers' bankruptcy to the AIG bailout and Merrill Lynch's sale to Bank of America, the latest round of financial shockers has had Wall Street traders scrambling. But it also has consumers wondering if it's a good time to buy a home or refinance, given the impact on mortgage rates. Here's how experts weigh in on what all this turmoil means for homebuyers:
What effect will the latest news have on mortgage rates?
Rates will most likely go down as investors, trying to find a haven in a rough stock market, turn to "quality" vehicles such as Treasury securities. As of Monday, Sept. 15, the prices on 10-year notes had already gone up — which means their yields had gone down — since the announcements over the preceding weekend. Since 30-year mortgage rates tend to follow the yield of 10-year Treasury notes, those rates also fell, explains banking consultant Bert Ely. Bankrate.com reported an average 30-year fixed rate of 5.78% earlier this week, down from the previous week's 6.08%. In August, 30-year fixed rates hovered around 6.5%.
But such declines could be temporary, says Keith Gumbinger, vice president of HSHAssociates.com, which tracks the mortgage industry for consumers. Indeed, by the latter half of this week, rates had already bumped back up almost a quarter of a percentage point.
So does that mean it's a good or bad time to buy a house?
It depends. While mortgage rates are attractive, lenders are increasingly picky about borrowers in the aftermath of the subprime mortgage crisis. Many lenders require larger down payments (at least 5% or 10%) and higher credit scores to qualify for rock-bottom interest rates, which could make it harder — or more expensive — for consumers with shaky credit to take out loans.
"If you've got an opportunity to get a loan in this market — if you can make it over all the hurdles to get access to financing — then yes," it's a good time to buy, says Gumbinger. But, he adds, "it's also a know-thy-lender market, as firms are closing doors and disappearing, so it might not be a bad idea to have a second source of funding available in case your deal falls apart." That advice is especially important for consumers with less-than-stellar credit, he adds.
What about the government's takeover of Freddie Mac and Fannie Mae? Did that end up lowering rates?
Rates did fall slightly in response to the government's intervention, and industry experts predicted overall declines of between a quarter of a percentage point and a full percentage point.
What happens next? Will rates continue to drop?
Nobody knows. Rates have been on a roller coaster all week. If the stock market rebound holds, for example, investors might put their money back in more aggressive vehicles.
Other factors to watch include inflation, economic growth and changes to the Fed rate. But in this environment, even a cut to the Fed's rate would most likely have little impact on the mortgage rates consumers face, Gumbinger says. Only when the mortgage industry recovers, as measured by key factors such as rising home prices and a decline in delinquency filings, will rates fall significantly. His prediction for when that day will come? Probably sometime next year.
By Kimberly Palmer, U.S. News & World Report
