Interest Rates, Congress, and Your Mortgage

What changing rate conditions and the proposed stimulus plans mean for homeowners.

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The Fed cuts rates, yet mortgages appear more expensive, and Congress is set to take wide-ranging action to prop up the economy: What's a borrower to make of all this flux? Here are some answers.

Does the latest half-point interest rate cut by the Federal Reserve make it easier to get a good deal on a mortgage? Will it make the mortgage I already have cheaper?

A decrease in the federal funds target rate generally makes it cheaper for banks to borrow money from each other on a short-term basis. But mortgages are based on longer-term interest rates, which are also influenced by expectations about the economy and inflation. Rates can rise, as they did last week, when investors react to news, such as the Fed cut, and expect it to strengthen the economy or spur inflation, explains Doug Duncan, chief economist at the Mortgage Bankers Association. According to MBA's weekly survey, the average interest rates for 30- and 15-year fixed mortgages increased about a tenth of a percentage point over the past week, to 5.6 percent and 5.04 percent, respectively. For many homeowners already paying off a mortgage, the Fed's actions may be irrelevant, because they are locked into a fixed interest rate. However, if that locked rate is higher than current ones, it may make sense to consider re-financing. Adjustable-rate mortgages are sometimes tied to banks' prime lending rates, which tend to follow the federal funds target rate but are more frequently pegged to other short-term interest rate indexes, so the impact of the Fed cut will vary. "That's why we tell consumers to shop around," Duncan says.

Would the proposed stimulus packages help me with my mortgage payments?

The stimulus package developed by House leaders and Congress contains a provision that would raise the limits on home loans backed by Fannie Mae and Freddie Mac to $625,000 from $417,000. That won't make much difference to current mortgage holders, but for those looking to buy homes that require such large mortgages—not uncommon in pricey areas such as Los Angeles and New York—it would probably help them get better interest rates because Freddie and Fannie will back them, reducing risk for the banks that issue them. And taxpayers can, of course, devote the rebate check they may receive—$600 or $500 per individual taxpayer in House and Senate proposals, respectively—to their mortgages. I still can't afford to make my monthly payments—what else is the government doing to help me?

The Senate Banking Committee is considering the idea of creating a corporation that would buy loans nearing delinquency at a discount and then allow homeowners to refinance them at more affordable levels. While the corporation would require money to get started, the committee says that it would not be costly over the long term because homeowners would pay back the value of the loan at its new price, and banks would be willing to sell the loans for a discounted price to avoid losing the entire value due to default. Banking consultant Bert Ely says that while this move would come too late to help some struggling homeowners, it could help those on the margin of keeping their homes, as well as preserve neighborhoods if the corporation maintains and rents out foreclosed properties. "It helps with the neighborhood, and that's where a lot of the problem lies," Ely says.

The mortgage industry has also launched programs to assist at-risk homeowners. Hope Now, a private-sector alliance organized by the Bush administration in December, helps homeowners refinance their mortgages to make them more affordable, among other forms of assistance. Lenders are also working individually with struggling borrowers. According to the Mortgage Bankers Association, almost a quarter of a million borrowers modified their loans or repayment plans in the third quarter of 2007.

One obstacle to helping distressed homeowners has been reaching them, Ely says. "One of the biggest problems is getting people to talk.... It's like someone with a serious illness who's afraid to go to the doctor." For those in trouble, contacting lenders directly is usually the first step—they don't want their borrowers to foreclose, either.