Possible Mortgage Bill Not the Real News for Today’s Borrowers
A possible Senate compromise on a mortgage relief bill took most of the mortgage headlines this week, but potential borrowers would do well to keep their eyes on the inflation front, where a new surge in oil prices threatened to drive interest rates higher.
Mortgage Compromise: Encouraging Refinancing
The Senate version of the mortgage relief bill appears to be similar to one passed by the House of Representatives earlier this month. It remains to be seen if President Bush would sign the bill. On the one hand, the apparent price tag is relatively cheap — $500 million to expand government mortgage insurance. However, the real cost is harder to gauge, since insuring those mortgages creates an unknown potential obligation in the future.
Ultimately, passage of this mortgage relief bill could prove less dramatic than it seems. In terms of addressing the current mortgage crisis, the bill represents nothing more than an attempt to induce refinancing. New government loan guarantees can create a safety net for lenders, if in exchange they are willing to write down some loan principal and reduce interest rates. It remains to be seen how many lenders will take this kind of deal.
In any event, this type of assistance doesn’t do anything to help future borrowers. In fact, pressuring lenders to take losses and reduce interest rates on existing loans may only make it more difficult for subsequent borrowers to obtain loans, and more expensive when they do. Losses realized by lenders will be viewed as a greater risk level for future loans, and that managing that risk is likely to take the form of tougher lending standards and higher interest rate premiums.
Mixed Signals on the Inflation Front
While the proposed mortgage bill does little for the borrowers of today and tomorrow, developments on the inflation front may impact those borrowers directly. Rising inflation usually means rising interest rates, and with oil surging through the $130 a barrel mark, it was apparent that inflation pressures were not subsiding.
A more encouraging note on inflation was sounded by the April Producer Price Index release, which came in at a moderate 0.2%. While less well known than the Consumer Price Index which measures end-user inflation, the Producer Price Index can be an important harbinger of future inflation because it represents production costs. A moderation in this measure of inflation is welcome, though of course the April figure does not account for the latest surge in oil prices.
The Bottom Line for Mortgage Shoppers
There is no end of chatter about whether or not the bottom of the housing market is near. For home shoppers looking for a place to live — as opposed to speculators looking for a property to flip — that is not the real question. The real question should be whether a mortgage is affordable at today’s home prices and mortgage rates. While home prices may continue to fall, there is no guarantee that mortgage rates will stay at today’s relatively low levels. The message, then, for home shoppers who find a place they can afford is that there is no good reason to delay, and there may be a price for doing so. Home buyers can start by actively shopping around for the best available rate.
Tags: borrowers, interest rates, lender, lenders, mortgage rates, refinancing
