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January 23, 2009

The drop in interest rates

There's good news for homeowners and homebuyers. Mortgage interest rates are headed down. Two questions about this: First, Why is it happening? And second: How important is it?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, the 'why' I think is easy, and it's based on the Federal Reserve a couple of weeks ago announcing that it would buy $600 billion worth of mortgages and mortgage-backed securities held by the big secondary mortgage lenders Freddie Mac and Fannie Mae. Now this is significant. This is big because Freddie Mac and Fannie Mae have been in trouble financially, and the fact that the Fed, in essence, says we're going to come in and directly bail you out – buy these mortgages – has given a big lift to the mortgage market. Translated, what it's done is really reduce the risk of making mortgage loans from banks to homebuyers. And so what we've seen is because that risk is down, interest rates are down. In fact, they're down big time. They're down to 4-year lows right now. Now the impact of this could also be very, very significant because the major sector in our economy that has to revive for the entire economy to revive is the housing market, and lower interest rates will help spur home buying because people will be able to buy homes with lower payments so their income won't have to be as high. We've also seen a big rush of homebuyers refinancing. That will be important to stave off some, not all, but some foreclosures. So this is very big, very important news for the potential economic recovery."

Posted by Dave at January 23, 2009 08:00 AM