Rates for mortgages to go down

By Don Shilling

Government investment instills confidence in the mortgage market.

Mortgage rates are expected to take a slight dip now that the federal government has stepped into the market.

Early indications are that rates should fall about 0.25 percentage points immediately, said Al Blank, president and chief operating officer of First Place Bank.

The downward pressure comes as the U.S. Treasury Department announced Sunday that it was seizing control of Fannie Mae and Freddie Mac, which buy mortgages from banks and sell them to investors.

The massive commitment from Uncle Sam could push rates down further, but most of the future rate changes will be based on economic factors that are hard to predict, Blank said.

Mark Zandi, chief economist at Moody’s Economy.com, is more optimistic. He told the Associated Press that he thought 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent.

Blank said interest rates should fall because investors will have more confidence in the mortgage giants with the government takeover. The companies had lost $14 billion in the past year.

The operations of Fannie Mae and Freddie Mac were so shaky that they were having to pay higher interest rates in order to attract investors to buy the mortgages that are packaged into securities, Blank said. Those investors are willing to accept lower interest rates now that the federal government is backing those securities, he said.

Banks can offer lower mortgage rates if the investors on the secondary market are willing to accept lower yields, he said.

Doug McKay, chairman and chief executive of United Community Financial Corp., added, however, that mortgage rates will drop only if Fannie Mae and Freddie Mac remain as active in the mortgage market as they have been.

McKay said he is waiting to hear whether there will be more restrictions on the type of mortgages that the two companies will buy. Youngstown-based UCFC is the holding company for Home Savings and Loan Co.

McKay said that lenders often sell their mortgages to Fannie Mae and Freddie Mac to lower their risk. A financial institution stands to lose money if it issues a 30-year, fixed-rate loan and interest rates increase later, he said.

Some lenders, such as Home Savings, continue to service the loans even though they don’t own them anymore. These lenders take the payments and send them to the secondary investor.

The move by the federal government comes as local banks report increased mortgage lending.

McKay said Home Savings is issuing more residential loans this year than it did last year. Delinquencies among single-family homeowners have declined and now are running at normal levels, he said.

Blank said mortgage lending at First Place is up slightly this year even though the local real estate market is still down. He said local banks have seen an increase because fewer mortgage lenders are in the market since the collapse of the sub-prime market.

McKay said the government’s move includes provisions to buy back stock from institutions, such as UCFC, that own stock in Fannie Mae and Freddie Mac. It isn’t clear what those payments will be, he said.

The Associated Press reported that The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest.

Blank noted that there is concern over how much the federal government’s move will cost taxpayers. Though the taxpayers are making a financial commitment, they also are getting benefits, such as lower interest rates and stability in mortgage markets, he said.

Treasury Secretary Henry Paulson refused to estimate how much the takeover of the two companies will cost the government, but he insisted that taxpayers will get paid back first.

“We structured this facility to protect the taxpayer,” Paulson said Monday in an interview on the CBS Early Show. “The government will be repaid ... before the shareholders of these companies get a penny.”