Mortgage rates plummeted Monday after the news of the federal government's takeover of the struggling mortgage giants Fannie Mae and Freddie Mac.
The move, which could cost taxpayers billions, served to drive down mortgage rates on 30-year and 15-year fixed rate mortgages, although there is skepticism about how long that will last.
Loans dipped as much as one-half of a percentage point on Monday, an almost unprecedented free fall, according to local mortgage brokers.
"We've been slammed all day from prior clients who heard the news and are wanting to find out if they can refinance," said Steve Curnutte, president of Finworth Mortgage, a part of Nashville-based InsBank.
He said his lowest rate fell from 6.25 percent on Friday to 5.75 percent on a 30-year-fixed rate loan with no points or extra fees.
At Pinnacle Financial Partners, rates fell from 6.125 percent on Friday for a 30-year fixed rate mortgage to 5.875 percent. On a $150,000 loan, that equates to a mortgage of $888 per month — a drop of about $24 per month in a single day.
Rates were as high as 6.5 percent 10 days ago, meaning homeowners will pay $61 per month less for that same home at current rates, said Pinnacle's senior vice president Scott Ractliffe.
Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, averaging 6.35 percent nationwide, could dip close to 5.5 percent.
That's because investors will be more willing to buy the debt issued by Fannie and Freddie, and at lower rates, since the federal government is now explicitly standing behind that debt.
Mortgage brokers, eager to drum up new business during slow times, began calling their customers, urging them to refinance.
Tim Davis, an owner of Titan Home Loans in Nashville, said his company would call 25 customers who might benefit from refinancing by the end of the day on Monday.
"We think this is a short-lived thing," Davis said. "That's how fickle the market is."
"I'm recommending people go ahead and lock in their rates today,'' said Sam Averbuch, owner of Midtown Mortgage in Nashville. "The market a lot of times does not create a situation that is sustainable."
The government's takeover announced Sunday, and dismissal of Fannie Mae and Freddie Mac's chief executive officers, was meant to stabilize the two companies, which together own or guarantee half of the nation's mortgages. That's about $5 trillion worth.
The two companies have lost about $14 billion during the last year and their stock is trading at less than $1 per share each. Federal officials admitted they didn't know how much the move would cost taxpayers.
Taxpayers first in lineTreasury 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 in an interview on CBS' TheEarly Show. "The government will be repaid ... before the shareholders of these companies get a penny."
Those likely to get no help from the move are home equity borrowers, whose rates are influenced by the Federal Reserve.
Jumbo loan rates, for loans above $432,500 in the Nashville area, also didn't change much Monday.
Those with poor credit and little to no down payment to buy a home also aren't likely to benefit from the government's takeover of Fannie Mae and Freddie Mac.
"There's not going to be any more subprime or liar loans (loans with no documentation) from Fannie Mae and Freddie Mac when the government takes over,'' Middle Tennessee State University economist Bill Ford said.
"Who will be hurt are people trying to get a loan with no down payment, insufficient income, a lousy credit history … trying to buy a house too big for them to afford. That game is over."
Lenders tightened up paperwork requirements and began refusing borrowers with poor credit last year as risky mortgages began to go bad, long before the government's takeover of Fannie Mae and Freddie Mac.
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