Are Lower Mortgage Rates Key to Success?

To put a floor under home prices, the Treasury may take direct steps to reduce mortgage rates. Doing so could spark a real estate buying spree. On the other hand, it might have no real impact, since rates are already low and people still aren't buying.

One of the newest strategies under review in Washington is for the Treasury to possibly "buy down" interest rates. That means that the Treasury-and ultimately the taxpayer-would inject money into banks and mortgage lending companies to pay down rates. In return, lenders would then offer lower mortgage rates of just 4.5 percent to homebuyers.

The idea is getting lots of support and attention, and has strong backing from the National Association of Realtors (NAR), among others. The NAR recently conducted a study that they say validates the idea that even a 1 percent lowering of mortgage rates would translate into half a million home sales. The surge of sales activity, the NAR believes, would happen regardless of which Treasury plan caused mortgage rates to fall.  Plans include a buy down program, or the Treasury's purchase of mortgage-backed securities.

Contrarian mortgage rate view

Many people are not as optimistic as the NAR. They cite fresh evidence that Americans aren't in a buying mood, but are instead starting to save and conserve money, something most citizens haven't done for years. They claim that pushing mortgage rates down to 4.5 percent isn't even a full percentage point cut from current levels, so it may not have a significant impact on the housing markets.

By mid-December, for example, mortgage rates on 30-year fixed loans from major lenders, including Wells Fargo, were down to just slightly higher than 5 percent. That level is already an historically attractive one in any market cycle. As a result, pushing them down an extra half or three quarters of a point now, while people worry that we're heading into the worst economic period since the Great Depression, may not make a dramatic difference in consumer spending.

Credit problem still exists

Then again, a half-percentage drop in mortgage rates recently sent mortgage applications up more than 37 percent, according to the Mortgage Bankers Association. But that doesn't mean that all of those loan applications were actually approved. There's still a serious credit freeze problem, as banks remain reluctant to lend, and borrowers face tighter loan application guidelines and bigger down payment demands. Without accessible credit, it doesn't matter how cheap loans become. Nobody will be able to borrow if, as the saying goes, "the more things change, the more they remain the same."

What may be even more important to note is that the Treasury buy-down concept being discussed now would only apply to mortgage rates for those wanting to buy a home. It would do nothing to make it more affordable for those wanting to refinance out of bad loans into more manageable ones, which is at the heart of the real estate crisis.