The dramatic federal takeover of two mortgage giants has already made it cheaper to borrow money for buying a home.
What it has not done is guarantee that you can persuade a banker to loan you any money.
Lower rates are good for sales, but nowhere near enough to turn around real estate, said economist Roger Tutterow of Mercer University. “This is one piece of the puzzle. But by itself, it doesn’t solve all the challenges.”
News that the government has taken control of Fannie Mae and Freddie Mac — returning them from the private sector to their original status — sent mortgage rates down Monday: The average 30-year, fixed-rate loan Monday was 6.08 percent compared with 6.26 percent last week, according to Bankrate.com.
After a loan is made, a lender generally sells the right to collect on it. With so many loans going bad — and investors unsure which ones are toxic — many buyers have stepped out of the market.
Not Fannie Mae and Freddie Mac, which have come to own or guarantee about one-half of the nation’s $12 trillion in home loans.
Mortgage rates have been rising, further chilling an already sagging real estate market.
Rates typically run parallel to the yields on 10-year bonds. But the spread between the two has been higher for the past year because of fears about the risk in buying those loans.
“The risk was priced in,” said economist Michael Reksulak of Georgia Southern University.
Now, with the government promising to make good on any bonds sold by Fannie and Freddie, the spreads should narrow, and mortgage rates will fall — just not dramatically, he said. “This should have a lasting effect, but not a large effect.”
But for the slumping real estate market, any help is welcome.
Real estate, the engine of expansion after the 2001 recession, has seen construction nearly grind to a halt. Lists of unsold homes have piled up, thousands of homes have plunged into foreclosure, and prices have slid.
The woes are worse in some places than others — with the sharpest pain coming in areas that had the steepest climb in prices.
Atlanta’s market has been weaker, but nowhere near as traumatized as Southern California, Las Vegas or Florida.
But nationally, an industry that added millions to the work force is now shedding jobs from lawyering to decorating, from accounting to construction. Further damaging the economy, falling home values are hammering consumers. Resale prices of metro Atlanta homes were down 8.1 percent in the second quarter versus a year earlier, the eighth-best performance out of 20 metro areas, according to the S&P/Case-Shiller index.
Cutbacks in spending, in turn, spur layoffs in retail, hospitality and other sectors.
Although the economy overall has continued to grow, payrolls have lost about 600,000 jobs this year, according to the Bureau of Labor Statistics.
Against that backdrop, lower rates offer help but not salvation.
“On the margins, changes in mortgage rates are important, and bigger swings in mortgage rates are more important,” said economist Tim Duy of the University of Oregon. “It’s not going to change the overall picture.”
Lower rates in general tend to nudge home values up because it means a buyer can get a little more house for the same monthly payment. It also helps some first-time buyers get into the market — another boost to prices.
But economists don’t expect that push to overpower the mismatch between supply and demand.
Moreover, the credit crisis that started more than a year ago with a surge of delinquencies in the subprime market goes on. Lenders, afraid of more delinquencies, have become selective about what loans they make.
“I don’t think subprime borrowers will be buying a house in this market,” said Yildiray Yildirim, a Syracuse University finance professor. “We are going to see activity in the prime market.”
Lower rates do not mean looser standards, and that limits demand, which means that housing’s revival will be slow, Duy said. “It’s more about the availability of credit. Can you get the loan to buy the house, given your income and your credit scores?”
The frenzy of buying depended on adding millions of mortgage holders who were only marginally able to make payments and — in too many cases — not able at all.
Lenders have stopped lending to people like that.
Lowering mortgage rates will only change part of the equation, said Sandra Dunn, president and chief executive of Five Star Mortgage in Duluth.
Rates did fall a quarter point within a couple hours — and that is welcome news, she said. “It certainly will put a shot in the arm to refinance.
But at least thus far, there is no reason to expect lower rates to also mean more approved loans.
“The guidelines are still the same,” Dunn said. “There’s no new leniency as far as people qualifying.”
Credits: AJC
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