Making the Move: Fed Attacking High Mortgage Rates

The Federal Reserve and Treasury, faced with growing challenges and public outcry related to urgently needed bailout plans, are now attacking high mortgage rates. By doing so, they hope to help thaw credit markets, revive the dying real estate sector, and boost the overall economy.

After months of passionate controversy over Treasury bailout plans-and hardly any noticeable positive impact on bank lending or retail mortgage rates-the government is now resorting to direct manipulation of the markets that control those rates. The Federal Reserve just injected some $600 billion into the mortgage bond market, buying up mortgage-backed securities that are stalled because of the credit crisis and lending freeze. It's yet another attempt to bring down mortgage rates and help bail out the housing industry and homeowners alike.

Mortgage rates dropping

This time, it seemed to work, because mortgage rates immediately fell by more than half a point.  Some analysts saw mortgage rates drop by more than a full point. The Fed is also buying about $100 billion of financial obligations from Fannie Mae and Freddie Mac, trying to unburden those debt-ridden agencies. The companies are vital to the availability of mortgages for American homeowners, but due to their own poor lending practices, they've been teetering on the verge of bankruptcy.

The average 30-year mortgage rate was slightly above 6 percent a month ago, but thanks to these newly announced moves by the Federal Reserve, rates dropped to around 5 1/2 percent. That level is significant because, when rates got to that level at the very beginning of 2008, it triggered one of the biggest waves of refinancing that the nation has seen in about five years.

Refinance to a better mortgage rate

When people refinance to a better mortgage rate, their payments go down. That frees up additional cash each month.  If the Federal Reserve and Treasury can instigate a surge in refinancing by driving mortgage rates lower, that can have the same impact on the overall economy as a stimulus check, tax rebate, or other injection of money into American households.

Not only will that be good for the real estate markets and help to stem the tide of foreclosures, but it will also have a positive influence on the entire consumer economy. When people have smaller mortgage payments, they tend to spend the extra money buying goods and services. The more that happens, the faster the economy will recover and grow.

Unfortunately, there's a dangerous downside to both the manipulation by the Federal Reserve, and bailout money given to businesses by the Treasury. Taxpayers-the same ones who are supposed to spend more at the mall or the local realtor's office to help jumpstart the economy-are funding all of these programs. Unless they get a reasonable return on that investment, the situation could be just like borrowing from bankrupt Peter to pay debt-plagued Paul.