Just when you thought that mortgage interest rates were as low as they could go, they drop even lower making those in the industry wonder just when we will actually see the bottom. According to the weekly mortgage survey conducted by Freddie Mac , interest rates on 30 year fixed-rate mortgages averaged 4.85% the week of March 26th. This is down from last weeks average of of 4.98%. Rates for 15 year mortgages were averaging 4.58%.
Many critics say that even this drop is not enough to stimulate sales of new homes in the current economy. Tighter credit restrictions and buyer insecurity mean that even at the current low rates, home sales are unlikely to improve. Could we see mortgage interest rates as low as 3% in the next year? It has already happened for some IndyMac borrowers after the FDIC took control of the failing bank. Indeed, the Fed has been actively encouraging banks to lower rates for distressed borrowers in an effort to stem the rising tide of US foreclosures. Whether lowering the rates will have any effect on those borrowers already verging on foreclosure remains to be seen, but there is no doubt that low interest rates will encourage refinancing and stimulate home sales. All of which is great for customers and the economy but not so great for banks unless the rate changes signicantly prevent additional foreclosures.
Countrywide Financial (CFC), the now infamous home mortgage division of Bank of America and at one time the largest lender of home loans in America, may launch the most aggressive plan yet to stem the tide of home mortgage foreclosures. The mortgage modification plan is the result of a multi-state lawsuit that charges that Countrywide duped first time mortgage buyers into taking on loans that were beyond their means.
The details of the plan call for a reduction of interest rates aimed at borrowers of sub prime and adjustable rate mortgages (ARM’s). Interest rates could be cut to as low as 2.5% for some borrowers, although the cuts would be temporary. The idea is to decrease mortgage payments so that the total payment does not exceed 34% of a borrowers income, which is the approximate percentage that reputable lenders use to determine a persons eligibility for a home loan. Had Countrywide and other sleazy lenders used this formula to begin with, the mortgage crisis would have never happened.
In addition to cutting interest rates for distressed home buyers, Countrywide will freeze foreclosures until borrowers mortgages can be evaluated and readjusted. All legal proceedings against Countrywide will be suspended until March 1, 2009 provided they meet the goal of adjusting 50,000 mortgages. The final objective is to reduce 395,000 loans in states hardest hit by the sub prime crisis including California, Illinois, and Florida.
This will be the most aggressive and possibly the most effective plan to address the mortgage crisis to date. Key lawmakers are putting the pressure on other lenders to adopt the program since recent efforts by the Bush administration have done little but reward the irresponsible behavior that created the problems in the first place.