Mortgage Rates at 5 Month Low, Biggest Weekly Drop in 28 Years

Increased Availability of Mortgages

The precipitous fall in rates are an intended consequence of the Sunday takeover of Fannie Mae and Freddie Mac. This checks off the first in a series of three critical objectives made by Treasury Secretary Paulson in the government bailout--increase the affordability of mortgage financing. The confidence brought by the US government not only implicitly, but now directly ensuring the risk of the two government sponsored entities is showing its effect.

Lower mortgage rates should increase the availability and affordability of mortgages to borrowers that were still apprehensive. However, the trend toward falling 30-year fixed rate mortgage is certain to only be a temporary market adjustment as the Federal Reserve continues to eye inflation.

Housing Market Stability

Now Paulson is hoping you help him with another part of his bailout plan--market stability. The assumptions behind the takeover of Fannie Mae and Freddie Mac, who own or guarantee over 50 percent of American mortgages, is that increasing the availability of mortgage financing would bring home buyers and homeowners back into the market.

The theory goes that low rates increase borrowers and cures high housing inventories, free falling housing prices, and defaulting payments in the face of hefty adjustable rate mortgage rate spikes.

Reducing Housing Inventory

The current mortgage market is flush with homes for sale, a large percentage of which are foreclosures and bank sales at heavy discounts. The government plan for cleaning up the housing crisis is that cheap mortgage loans and cheaper home prices will draw in buyers. If successful consumers will gobble up these bargains and halt the free fall in housing prices.

Mortgage Refinance of ARMs

A nice secondary effect of these dropping rates is the potential to stem another emerging disaster--defaulting payments. Many current homeowners are being hit by large payment increases caused by adjustable rate mortgages. New rate reductions are certainly going to help making refinancing those risky loans more attractive.

Banking Uncertainty Remains

Amid the continued uncertainty in banking institutions, as Lehman, Washington Mutual, and Wachovia are all under the watchful eye of investors, mortgage rates should bring stability hope to the consumer side of the mortgage recovery.