If Rates Down, Interest Up?

Buyers Get A Break On Mortgages On Heels Of Fannie-Freddie Change

Modesto, CA — September 10, 2008
By: J.N. Sbramto, The Modesto (CA) Bee

Mortgage brokers and real estate agents are calling clients with good news this week: Home loan interest rates have dropped about half a percent, making bargain-priced houses even more affordable.

"I just heard about it. Isn't it great?" said Dennis Lanigan, who is helping his son, Quinn, buy a Modestotownhouse. They locked in their loan rate at 6 percent Tuesday, down from the 6.5 percent they expected to pay. "It's about a $45 a month savings. Now that will buy a nice lunch!"

The Lanigans can thank the federal government's takeover of Fannie Mae and Freddie Mac, according to their mortgage broker, Chris Harrigfeld, president of California Mortgage Associates.

"More people are willing to invest in mortgage-backed securities now that they're being secured by the government," explained Harrigfeld, who's been in the mortgage business 20 years. "When more money moves into the market, that drives mortgage rates down."

Fannie and Freddie own or guarantee about half of all U.S. mortgages, but they were financially crippled by soaring loan defaults. The Treasury Department last weekend began bailing them out by purchasing mortgage-backed securities to bolster their value.

"The mortgage rates dropped quickly Monday morning," said Marcy Nomelli, production manager for Ambeck Mortgage Associates in Modesto.

Last week, the 30-year, fixed-rate conventional loans had an interest rate of about 6.25 percent. By Tuesday, that rate was down to 5.875 percent. Nomelli said that drop will save a borrower about $64 a month on a $200,000 loan.

Federal Housing Administration loan rates dropped even more, falling from 6.5 percent to 6 percent. On a $200,000 loan, that would save the borrower about $65 a month.

"It's definitely going to make a difference for some buyers," Nomelli said. "It's good news."

Rebecca Robinson certainly was glad to hear it. She's buying a new four-bedroom Patterson house in Shea Homes' Waverly development for $251,000. Ambeck locked in her 6 percent FHA loan rate Monday afternoon.

"If you're looking for a home, now is the time to buy," said Robinson, who plans to keep her current Patterson house and turn it into a rental.

Robinson's timing was particularly good because she also was able to get down payment assistance from the seller, which will be outlawed Oct. 1.

SELLER 'GIFTS' TO END

FHA will stop allowing "gifts" funded by sellers, often shuttled through so-called Nehemiah programs, to be used to meet homeowner down payment requirements.

Federal lawmakers contend that sellers simply increase home prices to pay for the "gifts," which means that the government-backed FHA loans end up financing 100 percent of a home's value. When homeowners don't invest any money in a home, statistically they are more likely to default on their mortgages.

Down payment standards aren't the only thing that's changed in the mortgage industry.

"Qualifying for loans has never been tougher," said Paul Carroll, owner of Carrollton Mortgage Co. in Modesto. "We have to prove everything now."

Lenders no longer approve "no documentation" loans, which were common a few years ago. Now borrowers must demonstrate they can afford loan payments, verify their income and have decent credit scores.

For those who qualify, Carroll said home prices are cheap and mortgage rates are low: "If you make $2,500 a month, you certainly should be out there looking to buy a home."

Many investors are doing just that, and their loan rates also have dropped about half a percent since last week.

"I'm setting up investor pools to buy a lot of houses, and I mean a lot of houses," said Mike Zagaris, president of PMZ Real Estate in Modesto.

Zagaris said housing sales have been brisk this year, with most sellers being banks that are unloading foreclosed properties at deeply discounted prices. Once the foreclosures stop, he predicted that prices may start rising rapidly.

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For additional information, please contact Shelley Mitchell, smitchell@nehemiahcorp.org, 916-231-1999.

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