By: Christopher ClaiNobody has seen home mortgage interest rates at 4% since as far back as 1951. Now, the days of a 4% interest rate on
home mortgages may be returning as Federal Reserve Chairman Ben S. Bernanke makes moves to rescue the United States from the housing slump.
The numbers don't look good for Bernanke. Record foreclosures, falling home prices, and a battered economy that has lost 5.1 million jobs since 2007 will pressure the Fed to further reduce borrowing costs to keep the economy going.
Back in 1951, a convention mortgage averaged about 4.61 percent, when backed by the Veterans Administration it was at 4 percent, and when backed by the Federal Housing Administration, came in at 4.25 percent. According to a 1961 book written by Saul Klaman, called "The Postwar Residential Mortgage Market", mortgage rates during the 1930's were as high as 7 percent.
Bernanke, who spent his 20-year academic career writing and teaching about the Great Depression is using his knowledge to avoid the missteps policy makers made back then. He's taking steps to bring down mortgage rates, support the banking system, and buying back government debt and mortgage-backed securities to restore the credit markets.
Economists say that back in the Great Depression the Fed was very slow to react, and was more focused on backing the Gold Standard versus looking at the bigger picture. In a speech by Bernanke in 2004 at Lee University in Lexington, Virginia, Bernanke said "By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920's and 1930's greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well".
The Fed tightened credit at the start of the Great Depression, causing mortgage rates to jump to 7 percent. While in the 1940's, that rate began dropping to a range of about 4 - 5.7 depending on who the lender was. During that period, most loans were for up to 14 years.
Also, unlike the Fed in the Great Depression, Bernanke was not afraid to cut the Federal Reserve Bank's discount rate to rates as low as zero, earlier this year, for the first time in history.
Since the beginning of 2009, the Central Bank has purchased more than $300 billion in mortgage-backed securities to help cut home-loan rates through the week ending April 8th. According to data from Freddie Mac, the rate dropped to 4.78 percent in the week ending April 2nd, the lowest since they started keeping records in 1971.
Banks have also shown signs that they are more willing to lend, as the London interbank offered rate, or Libor for three-month dollar loans dropped to 1.2 percent on April 14 from 1.32 percent a month prior. It was as high as 4.82 percent on October 10th.
Economists at Wells Fargo doubt rates will fall to the desired level that Bernanke is looking for. They forecast that rates will go as low as 4.67 percent in June before rising the rest of the year as the yield on the 10-year Treasury yield is scheduled to increase.
Currently, the home average mortgage rate for a 30-year fixed dropped to 4.82 percent on April 16 from 4.87 percent a week prior as reported by Freddie Mac. According to Inside Mortgage Finance, overall home lending across the nation surged 60% in the first quarter to $407 billion.
However, Bernanke may find further problems on his hands, as home-loan insurers are refusing to service entire states or issue policies for loans obtained through independent brokers, which could cause another stagnation of the housing industry.
Though for now, Bernanke's goals seem to be getting slowly recognized as mortgage rates continue to fall, with rates for week ending May 14th as low as 4.86% for 30 year, and 4.52% for 15 year mortgages.
