Drop in Lending Rates Expected to Boost Sales of Foreclosed Homes

Time icon December 13th, 2008 by Autor Joseph Smith

The announcement of the Federal Reserve that it plans to spend about $600 billion to purchase mortgages has resulted to a drop in loan rates and improved home affordability, which many analysts hope will boost sales of foreclosed homes.

The Federal Reserve has announced that it plans to purchase about $500 billion of the mortgage-backed securities that were issued by government-sponsored enterprises, Federal National Mortgage Association or Fannie Mae and Federal Home Loan Mortgage Corp. or Freddie Mac.

Following the agency’s announcement, mortgage rates declined by more than 0.5 percent. The agency’s plan is part of its efforts to help homeowners of distressed properties and stabilize the housing market.

Credit Suisse analysts noted that the drop in mortgage loan rates resulting from the Term Asset-Backed Securities Loan Facility (TALF) has resulted to a better home affordability which may eventually boost sales activity in the housing market in 2009.

Analysts explained that a percentage-point drop in mortgage loan rates has similar effect on affordability with a 10 percent drop in home prices.

Furthermore, analysts estimated that mortgage payments on median-price homes represent 16.7 percent of a household’s median income, a decline from 21 percent.

After a historic increased in home prices due in part by easy access to credit, the residential housing market took a downturn as the number of unsold houses on the market remain high and will continue to rise if the foreclosure problem will not be addressed immediately.

Homebuyers are discouraged from buying foreclosed properties because of the difficulty of getting loans and uncertainty over the economy. However, the decline in mortgage loan rates and home prices are expected to attract cautious buyers.

Credit Suisse analysts pointed out that some foreclosed homes are selling at its lowest price level. Because of this, they expect a further decline of 15 percent in property prices in 2009.

However, they are hopeful that a lower mortgage rate could restrain the damage, abate the surge of foreclosures and stabilize the housing market.

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