Thursday, December 04, 2008

Are 4.5 percent mortgages worth the gamble?

The federal government can raise long-term debt right now for around 3 percent (actually less--10 year Treasuries are right now yielding less than 2.7 percent). So a 4.5 percent mortgage gives a spread of more than 150 basis points.

If the government-backed mortgages require 20 percent down payments, strong FICO scores from borrowers and full documentation, this is a good deal for the government. The default rate on 30 year-fixed rate, prime, 80 percent LTV and below mortgages remains quite low. Even if life-of-loan default rates for these types of mortgages triple, the taxpayer would earn a positive return on the program. And the value of the call option (ability to refinance) to the borrower would be low, because the program would apply only to purchase money mortgages.

On the other hand, the downpayment requirement, which is essential to making the program sound, will continue to prevent many potential buyers from getting into the housing market. So how effective it would be at stimulating housing demand is questionable.


Unknown said...

It's great to get as much information as possible about mortgages .

Anonymous said...

This 4.5% mortgage option just smells like something homebuilders and the realty association lobbied for. It doesn't solve the root of the housing problem, which is that the price is still too high.

Anonymous said...

While Deal Junkie believes prices are still too high,in the heartland, they are not.In states like Wisconsin who overly depend on government services,real estate is the lifeblood for basic services through the property tax.
Thus a dead housing industry is destructive to the basic functioning of our economy.
Granted the 4.5 rate is limited to those who have a job and a credit rating, but its better then nothing.

Anonymous said...

10 year bonds to finance 30 year loans. Interest rates are not likely to stay this low after the flight to safety is over. Rolling over the 10 year loans could be a problem. Half of the borrowing from overseas is currently less than 3 years. Rolling over the rapidly rising public debt could become challenging. At some point, overseas bond buyers may actually want positive real interest rates.

Issuing 30 year bonds to finance 30 year mortgages would make the program sounder.

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