My Mortgage Thoughts on 4.5%

A week ago Tuesday, on November 25th, the Feds announced that they would purchase $600 billion in mortgage related assets from Fannie Mae and Freddie Mac in order to help prop up the US housing/mortgage markets.  This announcement caused mortgage rates to drop a 0.5% immediately, causing mortgage rates to drop down to 5.375%.

This week, the headline on Thursday morning was — “Mortgage Rates Headed to 4.5%.”  Now, I have a theory about this whole thing, but first let me talk about the headline.  The headline should have really been “Mortgage Rates Headed to 4.5% ??” and by the end of the day, the headline had changed to a much more appropriate “Mortgage Rates Could Be Headed to 4.5% (Probably for Purchases Only).” 

I personally think the real headline should have been “Mortgage Rates for Purchases Could Head As Low as 4.5% with the Help of the Treasury (Although this Idea is Speculative and Could Have to Wait for New President Obama to Really Take Effect, Although There May Be an Announcement Next Week from The Treasury Department).  But I guess that is just too much to print on a headline.

Here is a good article from the Wall Street Journal

Two things.

1.  First my advice.  Don’t wait for 4.5% (unless you are currently at 5.5%).  If it makes sense for you to refinance at 5.375% or 5.25% or 5.125%, lock-in your rate, refinance your mortgage, and save some money.  If you look at any historical data, you will see that 5.25% and 5% is about as low as investors are willing to loan money to people for 30 years.  Would you lock-in a CD of $250,000 for 5.0% return?  For my clients, my advice is this:  lock-in when it makes sense for you, and try to lock-in as close to the bottom as possible.  Only a VERY SMALL percentage of people will lock-in at the very bottom.  And the only way that those people lock-in at the bottom is because they lock-in (and then the next day rates go up, never to return again, to confirm, that in-fact, they did lock-in at the very bottom the day before).  The person who waits and doesn’t lock-in (hoping for rates to go just a little bit lower) will miss the bottom and lock-in as rates move up — ultimately, missing the bottom, but locking in close to the bottom.

2.  Here is my theory for 4.5% (just a theory).

The most recent attempt to spur on the housing market by the government came in the form of a tax credit to applicable home buyers.  This program, while currently available, is mostly unknown of by the general public.  It is a downpayment program allowing people who purchase a house to receive a tax credit (which is really a tax-free loan from the government paid back a little at a time as taxes are filed each year).  And this program, while nice, in my opinion, has not done much to spur home purchases.  Do you think that the information this week was a “leak” from the Treasury department about 4.5%?  You may call it that . . . I call it a better marketing strategy.

The Feds goal is to help lift the housing market – to help more available buyers get in to the market (assuming good credit and 5% downpayment) and to assist in holding up home prices.  And here is how I think they could do it.

(remember, totally a theory)  For anyone who purchases a home in 2009, and obtains a mortgage to purchase that home, will pay an effective rate of 4.5%.  At the time the purchaser files their tax returns, the IRS will have a new form (imagine that) where the difference between the mortgage obtained (let’s say 5.25%) and the effective rate of  4.5% will be calculated as a monthly difference.  This difference will be multiplied by the number of months of payments made in the tax year, and this dollar amount will be given back to the purchaser as a tax credit – and will continue for as long as the borrower continues to make payments to the mortgage and as long as the property remains their primary residence (and maybe even as long as the borrower makes less than x$$ per year). 

Theory one-b is a similar approach but with the subsidy going to the mortgage lenders, allowing them to make the real rate 4.5% to the borrowers — but in my opinion, the calculation of tax credits to individuals would be a little easier.  Plus it would allow the government to insure that the 4.5% was only being used by people to purchase a home to live in.  Plus, plus, paying a lender to buy down a rate to 4.5% for 30 years is a lot more expensive than paying a tax credit for ONLY the years the purchaser is making mortgage payments.

Now . . . could I be wrong?  Could the government write a giant check so that everyone with good credit and marginal equity could purchase  a new house and refinance their mortgage at 4.5%?  Could the government open a giant pool of funds to begin purchasing mortgage assets direct, offering a rate of 4.5%?  Could the government write a check to lenders and say, “hey, we know you are going to lose a ton of money at 4.5% (remember, how much you lost because of default, cost of business, etc even when rates were at 6.0?)”.  Could I be wrong?  Could mortgage rates be at 4.5% on Monday?  I don’t think so. 

But, hey.  I could be wrong.  Actually . . . I would LOVE to be wrong.   


Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit


One Response to “My Mortgage Thoughts on 4.5%”

  1. Realty Caffeine » Blog Archive » One perspective on 4.5% Says:

    […] is an article that I thought was well said. Check out Hillside Lending and see what you […]

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