Regardless of how the financial bailout plan affects the overall economy, mortgage rates may fall in the short term, but will have to rise before long. Without raising underlying interest rates, which will eventually push mortgage rates higher, the nation can't wage its financial battles.
Mortgage rates may fall on news of the bailout, but experts agree that they're likely headed in an upward trajectory. Our current economic climate remains dire and uncertain, and even if the Fed wants to free up money, there's really no room to do so without activating wild inflation. Slashing rates now is like jumping out of an airplane and hoping that your parachute will open. Already this year, an unusually aggressive Fed has slashed rates to bargain basement levels; even so, it didn't create sustainably low mortgage rates.
Mortgage rates movin' on up
The potential and pressure for mortgage rates to move to the upside is tremendous. As other countries shy away from investment in the U.S., prices of Treasury products fall. That, in turn, raises the rates on those investments that have a direct impact on mortgage rates, and pushes them higher. Add to that the fact that in order to rein in the pain of a weakened dollar-one of the primary reasons that oil and other imports are so expensive-the Fed needs to raise rates.
While the bailout of Wall Street or Main Street may inject confidence in the markets and send mortgage rates down in the near term, any such move will likely be temporary. That's because the Fed has already dropped its key rates down to only 2 percent, which hasn't stimulated the economy, but has created dangerous inflation-from the gas pump to the grocery store.
Meanwhile, the baby boomer population is hitting its peak, putting greater demands on the economy at a time when the U.S. faces record deficits, a devalued dollar, and a long-neglected physical infrastructure. Plus, American households are saving less than they have since the Great Depression and spending more than they take home each month. Regardless of what bailout policies are agreed upon and enacted, or who wins the Presidential election, the nation has a hard row to plow for the foreseeable future.
Mortgage lenders face tremendous financial problems of their own at a time when they also confront greater government oversight and stiffer regulation. The cost for banks and other lenders to borrow money to lend to customers has nearly doubled during the past few weeks, and an infusion of bailout money will certainly ease that burden and may cause lower mortgage rates. But stiffer underwriting standards will cost banks more to process their mortgages, while they're simultaneously forced by regulations to show more cash on their books. That means that borrowers will pay higher transaction fees and mortgage rates, and those who fail to meet the new mortgage application standards will have to go to even higher-priced lenders whose mortgage rats will be considerably steeper.