With the housing-triggered credit crisis growing increasingly ugly, Washington is considering embarking on the most-sweeping bailout of the financial system since the Great Depression. Under the terms of the legislation—which still faces an uncertain road through Congress—the government would purchase up to $700 billion of souring mortgage securities and other assets from banks. The result, its supporters hope, would be to revive the credit markets and avoid broader damage to the economy. But what impact will this massive government intervention have on mortgage rates? To answer that question, U.S. News turned to Mike Larson, an analyst with Weiss Research. Excerpts:
What would the bailout plan do to mortgage-rate trends?
One of the goals of this plan is to calm the credit markets and narrow the “spread”—or difference—between mortgage rates and rates on risk-free treasuries. The Treasury Department’s recent announcement that it would buy mortgage-backed securities in the open market is also designed to obtain the same results. But the problem is all these programs cost money. Lots of money.
It’s not like we as a country have that money sitting in a bank somewhere. We’re going to have to borrow it—or in other words, sell treasuries by the truckload. All else being equal, that large new wave of treasury supply should pressure treasury yields higher. So even if spreads tighten, rates on underlying treasuries should rise. The likely net result: Mortgage rates go up.
What’s your outlook for fixed mortgage rates over the next six and 12 months?
A 30-year fixed-rate loan goes for about 6.09 percent, per the September 25th Freddie Mac weekly data. I don’t believe rates will shoot up from here, but I do believe the trend will be gradually higher over the coming year. Six months from now, we could be looking at a rate in the mid-6s. A year down the road, maybe 7 percent.
Click here to read the full article …
