Will Proposed Interest-Rate Buydown Make an Impact?

Market Statistics/Performance, Mortgage Lending, News 1 Comment »

As the overall economy continues to falter, the federal government is now looking at a plan to push down mortgage interest rates to below 5% - far lower than any rate seen ever. This proposal was detailed in yesterday’s Wall Street Journal, and is beyond the plan announced last week to buy up to $600 billion in debt issued or backed by Fannie Mae or Freddie Mac. The Journal reports:

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.

Borrowers would have to qualify for a mortgage guaranteed by Fannie, Freddie or the Federal Housing Administration. Those guarantees apply to loans where borrowers can document their income and afford their monthly payments, steering the government away from backing loans considered risky.

The National Association of REALTORS® (NAR) has expressed support for such action, and it is part of a Four-Point Plan NAR unveiled a few months ago to stimulate the housing market.

But the plan has critics, who question how effective such action will be considering that home prices continue to fall and that unemployment rates are expected to climb into 2009.

What do you think? Is this the right approach for the government to take, or will the results have little impact on the housing market?

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