With mortgage rates in flux, some wait

Could a 4.5 percent mortgage be your personal piece of the bailout pie?

Apparently, large numbers of consumers thought precisely that during the week following disclosure that the Treasury Department was working on plans to slash loan rates for consumers who buy houses in the coming months.

But in the meantime, the news threw a wrench into the marketplace — making some shoppers reluctant to commit to buying without guaranteed access to 4.5 percent mortgage money. In some cases, it stalled deals that were ready to go.

"It put us into limbo," said Dennis Badagliacco, CEO of Altera Real Estate, a brokerage firm based in San Jose, Calif. "Once [news] leaked out, it immediately slowed down" the pace of sales contracts and discussions, he said — an ironic side effect of a plan ultimately meant to stimulate real-estate transactions.

Customers didn't want to gamble that they'd be locked into a 5.5 percent mortgage when 4.5 percent financing might be readily available if they simply waited a week or two, Badagliacco said.

Interestingly, the National Association of Realtors, of which Badagliacco is a director, was the primary force behind the concept of federal intervention to lower rates by a full percentage point. Representatives of the association brought the proposal to federal officials as part of a multiple-point plan to kick-start the economy through housing.

The Federal Reserve has formally adopted one of the group's recommendations — committing to buy $500 billion in mortgage securities to inject liquidity into a market burdened by investors' fears and to buy $100 billion in debt issued by Fannie Mae and Freddie Mac.

Those moves knocked conventional 30-year mortgage rates down by half a percentage point within a day, from 6 percent to 5.5 percent.

But setting up a program whereby the government would buy securities backed by loans originated by private lenders at 4.5 percent would take longer to implement.

After reports of the plan leaked out, "it created a lot of confusion" among lenders and loan applicants, said William Emerson, CEO of Quicken Loans, a national lender based in Livonia, Mich.

Details were sketchy about eligible types of loans, maximum mortgage amounts and underwriting criteria, and it wasn't immediately clear how much help, if any, a 4.5 percent rate could provide to consumers who are in the most serious trouble — behind on their payments and underwater on their houses.

"Four and a half can help, no question," Emerson said. "Maybe you'll save $50 to $150 a month off your payments."

But that doesn't solve all the other key issues and job losses that are keeping people out of the homebuying market.

What's the actual impact of a 4.5 percent rate? On a $200,000 30-year loan, reducing a 5.5 percent rate to 4.5 percent lowers principal and interest payments from $1,135.58 to $1,013.37, a saving of $122.21 a month.

On a $300,000 loan, the same rate cut saves $183.31 a month, while on a $400,000 mortgage, the savings comes to $244.42.

In other words, the bigger the mortgage you need, the more you save with a 4.5 percent rate.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., welcomes the idea of government assistance to lower homebuyers' rates for as long as necessary to put a floor under depressed housing prices.

"Once people begin to have confidence that prices aren't going down anymore and that there's money at low interest rates to make purchases more affordable, you're going to see an explosion of [buying] activity," Skeens said.

But Skeens agrees that simply lowering the cost of mortgage money isn't a panacea.

Today's tough underwriting rules — higher down payments, higher FICO credit scores, plus full documentation of income and assets — could block many potential applicants.

Even FHA loans, with 3 percent minimum down payments and generous debt-to-income limits, require higher credit scores — usually a minimum of 580 FICOs.

So what do you do if you're already well along in your shopping, you've found a house at a great price, and you're ready to apply for a mortgage at 5.5 percent but don't want to miss out on potentially lower rates?

Ask your broker or loan officer whether you can lock in today's rate but still have the ability to move down should cheaper money become available to you.

Not all lenders can accommodate such requests. Some brokers offer 60-day locks with that option; others may charge you.

Either way, you're better prepared for your own little bailout — just in case it comes your way — without having to risk losing the house you really want.

Kenneth R. Harney: kenharney@earthlink.net