In late December of last year, the Federal Reserve Board took an unprecedented step and lowered its short-term target interest rate to practically zero. This move demonstrated that the Fed had made a solid commitment to provide the additional support that the housing market so desperately needed by continuing to purchase mortgage-backed securities.
As a result of the Federal Reserve's actions, rates on 30-yr. fixed mortgages fell to below 5%; their lowest rate in 50-plus years.
If the rates remain at their current levels, nationwide, sales of homes could see an increase of up to 10%-15%, and provide some areas with much-needed price stabilization. In light of this strong opportunity for growth, the market is plagued with additional major challenges. Inventory levels are clogged with short sales which can take months to clear when sold. Additionally, credit score requirements for potential borrowers have become overly stringent.
Jumbo loans and commercial real estate mortgage markets are seeing little to no relief as these types of loans are not being purchased by Fannie Mae and Freddie Mac. The National Board of Realtors is requesting the government's assistance with the development of ways to make nonconforming mortgage markets more liquid and to expedite the process of short sales.
To help spur the market for nonconforming mortgage lending, the government can create a credit program where lower-risk commercial and jumbo loans could be purchased by Freddie Mac and Fannie Mae. This move would in turn lower rates on these types of loans.
Short sales can be expedited through set processing guidelines while offering lenders incentives to process short sales in a timelier manner. Good performance by lenders could be rewarded with federal rescue funds.
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