The latest round of financial shockers didn't just send Wall Street traders scrambling—the problems also have 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 Lehman Brothers' bankruptcy and Merrill Lynch's sale to Bank of America mean for home buyers:
What effect will the latest news have on mortgage rates?
Rates will most likely go down as investors, trying to find a safe haven in a rough stock market, turn to "quality" vehicles such as treasury securities. The prices on 10-year notes have already gone up—which means their yields have gone down—since the weekend's announcements. Since 30-year mortgage rates tend to follow the yield of 10-year treasury notes, those rates have also fallen, explains banking consultant Bert Ely. Bankrate.com reports an average 30-year fixed rate of 5.78 percent, down from last week's 6.08 percent. In August, 30-year fixed rates hovered around 6.5 percent.
But such declines could be temporary, says Keith Gumbinger, vice president of HSHAssociates.com, which tracks the mortgage industry for consumers. The weekend's news underscores just how shaky mortgage investments are right now, which could drive rates up. They also could be pushed up by Lehman unloading its own mortgage-related assets onto a glutted marketplace.
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 percent) 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 last week 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. Ely points out that the mortgage rates could tick back up as quickly as they ticked down. If the stock market rebounds, for example, investors might put their money back in more aggressive vehicles. Then the yield on 10-year treasury notes would be likely to rise again, driving mortgage rates back up.
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.