Low Rates Alone Not Seen Reviving Housing Market

August 17, 2011

Long-term mortgage rates have dipped to near-record lows thanks to turbulence in the financial markets, but the favorable borrowing costs are not expected to invigorate the struggling housing sector.

That's because about half of all U.S. home owners do not qualify for rock-bottom financing. In order to get the best rates, Inside Mortgage Finance publisher Guy Cecala says consumers must have solid credit. They also must own a home that is valued 20 percent above what is owed on it, he says, but residential depreciation has made this an impossibility for many borrowers.

Helping homeowners like these to refinance and line their pockets with some extra cash would go a long way toward buoying the economy, according to some, but government intervention may be necessary. Columbia Business School housing economist Chris Mayer and colleague Glenn Hubbard have come up with a proposal that Mayer says would help 25 million households shave hundreds of dollars each month off their mortgage payments.

"This would be a big positive effect on the economy in terms of consumer spending," Mayer explains. "And it would reduce the incentive for people to walk away from their mortgages."

Mayer says millions of home loans already have a government guarantee because they're backed by Fannie Mae and Freddie Mac. "We should reduce the risk of those mortgages by extending a guarantee to a new mortgage that somebody would get at a lower interest rate," he suggests. Martin Barnes, chief economist at investment firm BCA Research, also likes the idea of a national refinancing initiative. "If you're going to do something about housing," he speculates, "you should make it available to everyone."

Source: Low Rates Alone Not Seen Reviving Housing Market, NPR (8/15/11)

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