Jan. 8 (Bloomberg) — The largest U.S. banks are starting to offer fixed home loans below 5 percent after the government began buying mortgage securities to bolster the housing market. The offers are for borrowers with excellent credit who put 20 percent down.

The Federal Reserve earlier this week began purchasing $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae to help lower mortgage costs. While the lower rates may lead more borrowers to refinance, it may not spur home buying in the second year of the recession after more than 2 million jobs were lost in 2008.

“I don’t know if there is a magic number now that everyone is freaking out about the economy,” said Paul Miller, a mortgage industry analyst with Friedman Billings Ramsey & Co. in Arlington, Virginia. “The home buyer is scared out of the market.”

Freddie Mac is expected to report 30-year fixed mortgage rates today. The fixed rate dropped to 5.10 percent, the lowest on record, last week from 5.14 percent a week earlier, the McLean, Virginia-based mortgage finance company said on Dec. 31.

Lower Yields

The Fed’s purchase program, which also includes buying $100 billion in direct debt, is intended to lower consumer rates by reducing the supply of agency mortgage bonds issued by Fannie, Freddie and Ginnie. That would boost their prices and lower yields, in turn reducing the interest rates banks charge on new mortgages to ensure sales of the securities are profitable. Agency bonds now facilitate almost all new home lending.

Jill Pfeiffer, a mortgage broker in San Diego, this week obtained a 4.875 percent rate on a 30-year fixed loan for a homebuyer with a credit score above 750, she said in an interview.

“It’s the lowest I’ve ever locked in on a 30-year fixed” since she began her business in 1996, she said.

Prices Declining

Rates are dropping as home prices in 20 major U.S. cities declined 18 percent in the year through October, the fastest rate on record, as tighter lending standards curbed sales and foreclosure sales pushed down values.

Sales of single-family homes declined 7.6 percent in November from the prior month, the most in two decades, according to the Chicago-based National Association of Realtors. Resale prices fell 13 percent, the most since the Great Depression in the 1930s.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped to 1,143.8 for the week ending Jan. 2, from a five-year high of 1,245.7 the prior week, as consumers held out for lower rates. The group’s purchase gauge rose 7.3 percent and the refinancing measure decreased 12 percent.

Applications for home-loan refinancing and new purchases may increase as rates drop below 5 percent and exceed the five-year high of two weeks ago, Jay Brinkmann, chief economist for the Washington-based Mortgage Bankers group, said in an interview.

Lower Rents

“We would expect that activity to continue,” Brinkmann said of increased mortgage applications.

Lower rates may not encourage some buyers because U.S. apartment rents are falling and landlords are offering concessions such as free rent to avoid higher vacancies.

Apartment rents fell in the fourth quarter from the third as the national vacancy rate climbed to a four-year high of 6.6 percent, Reis Inc. said yesterday in a report.

Asking rents fell 0.1 percent from the previous quarter, to $1,052 on average, their first quarter-to-quarter decline in almost six years. Effective rents, what tenants actually paid, fell to an average $996 last quarter, down 0.4 percent from the prior quarter.

“Even if rates go low enough, if you got married, you’re 28 years old with no kids — the typical first time buyer –you’ll wait a year and continue to rent because there are good deals out there,” said Miller, the mortgage analyst.

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net.

Last Updated: January 8, 2009 00:01 EST

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WASHINGTON — 

Homeowners around the country are scrambling to refinance their mortgages at the lowest rates since the early 1960s as the economy staggers through what’s likely to be the worst recession in decades.

Mortgage brokers are already reporting a surge of calls from borrowers trying to take advantage of the Federal Reserve’s extraordinary actions this week.

The central bank, aiming to free up lending and jolt the economy back to life, on Tuesday cut the federal funds rate from 1 percent to a target range of zero to 0.25 percent and pledged to keep funneling money into the market for mortgage investments.

On Wednesday, some mortgage brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.

“This is beautiful, oh my gosh!” said Patti Mazzara, a mortgage broker in the Minneapolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. “This is a whole new game now. Hopefully it’s going to give people some relief.”

The national average rate on 30-year, fixed mortgages was 5.06 percent on Wednesday, according to financial publisher HSH Associates — the lowest since the 1960s and down from 5.3 percent Tuesday.

It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won’t be able to take advantage.

“It’s a call to action for homeowners looking to get out of adjustable-rate mortgages,” said Greg McBride, senior financial analyst at Bankrate.com. “Unfortunately, it’s not an equal-opportunity party.”

Analysts say the Fed’s moves to buy up mortgage debt are designed to reduce the an unusually large difference, or spread, between mortgage rates and yields on government debt.

In recent years, there has been about a 1.8 percentage point difference between the yield on a 10-year Treasury note and 30-year mortgage rates, but gap currently hovers around 3 percentage points.

Falling interest rates mean Americans could suddenly find billions of extra dollars in their pockets at a time when consumers have sharply cut back on spending amid rising unemployment and declining household wealth. But many experts believe that the interest rate cuts alone won’t be enough to jump-start the economy.

“It’s a tall order to get (people) to go out and spend again,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “That’s why you also need a stimulus.”

President-elect Barack Obama’s advisers are currently contemplating an economic recovery plan that could cost as much as $1 trillion over two years.

Meanwhile, government data to be released Thursday is expected to show that new claims for unemployment benefits dropped last week but remain near a 26-year high, and a monthly forecast of economic activity is forecast to fall for the second straight month in November, in two signs of a deepening recession.

The Labor Department’s tally of initial jobless benefit claims for the week ending Dec. 13 is expected to drop by 15,000 to a seasonally adjusted level of 558,000, according to a survey of Wall Street economists by Thomson Reuters.

Last week, the government said claims jumped by almost 50,000 to 573,000, the highest level since 1982, though the labor force has grown by about half since then.

Later in the morning, the New York-based Conference Board’s index of leading economic indicators is expected to fall 0.5 percent, according to the consensus estimate of economists surveyed by Thomson Reuters. The index posted a 0.8 percent decline in October.

The index is designed to forecast economic activity in the next three to six months based on 10 economic components, including stock prices, building permits and initial claims for unemployment benefits. And Freddie Mac, the mortgage company, is also scheduled to release its weekly survey of mortgage rates Thursday.

Wall Street stocks finished moderately lower Wednesday, as further signs of economic deterioration dampened investors’ earlier enthusiasm about the Fed’s record interest rate cut.

Stocks declined in the early going after a larger-than-expected loss from Morgan Stanley offered fresh evidence of the sizable obstacles the battered financial industry still faces. The company posted a loss of $2.37 billion, or $2.34 per share, for the fiscal fourth quarter. The report came a day after rival Goldman Sachs Group Inc. posted its first quarterly loss since going public in 1999.

 The Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets.

“NAR has been aggressively calling for mortgage rate reductions, and the Fed’s action to slash interest rates, coupled with the actions by the Federal Housing Finance Agency and the Department of the Treasury, has driven down interest rates to make the dream of homeownership once again attainable for thousands of Americans,” said NAR President Charles McMillan.

Mortgage rates, which had averaged 6.3 percent in the third quarter, have recently fallen into the 4 percent range in some parts of the country. “That is the lowest rate in nearly 50 years and will bring buyers back to the market,” McMillan said. “We are pleased that the government heard our message and responded to our call for action.”

NAR has estimated that a one percentage point decrease in mortgage rates will increase home sales by more than 500,000 homes. “To boost the economy, it is critical to stem the rising tide of foreclosures and boost home buyer confidence in the housing market,” McMillan said. “Lower interest rates coupled with increased foreclosure mitigation are the key ingredients to stabilizing the housing market and preserving communities and homeownership.”

NAR continues to call on the federal government to maintain the higher loan limits passed in the economic stimulus bill earlier this year and to expand the $7,500 tax credit for first-time home buyers to all buyers and to eliminate the credit repayment requirement. “Together, all of these actions will stimulate and stabilize the housing market and begin an overall economic recovery,” McMillan said.

The National Association of Realtors(R), “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Information about NAR is available at www.realtor.org. This and other news releases are posted on the Web site’s “News media” section in the NAR Media Center.

REALTOR(R) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS(R) and subscribe to its strict Code of Ethics. Not all real estate agents are REALTORS(R). All REALTORS(R) are members of NAR.

SOURCE National Association of Realtors

Q: What’s the good news in the Fed’s actions?

IN WASHINGTON: Fed cuts interest rates to near zero

A: The Fed’s decision to nudge its key fed funds rate to a range of zero to 0.25% — along with its plans to buy securities that are backed by mortgages — should mean lower consumer interest rates, particularly mortgage rates. Low mortgage rates mean that more people can afford to buy houses, which will help revive the moribund housing market. A drop in mortgage rates will also allow homeowners to refinance their loans at lower rates, easing some of the burdens of their debts.

Low rates also make it cheaper for companies to borrow and expand. That, in turn, is a powerful economic stimulus. Most major banks, including Bank of America and Wachovia, lowered their prime lending rate to 3.25% from 4% Tuesday.

The Fed also signaled that it is willing to try other things to stimulate the economy, including buying Treasury securities. “They’re saying, ‘We’re going to do whatever it takes for as long as it takes,’ ” says John Silvia, chief economist for Wachovia.

Q: What’s the bad news?

A: The Fed wouldn’t lower rates this far and signal its willingness to take a host of unconventional actions if the economic situation weren’t so dire. The nation is entering the 13th month of a recession, and the unemployment rate hit 6.7% in November, up from 4.7% a year earlier. The Fed is worried about an extremely severe recession and the outlying possibility of deflation — a persistent decline in prices. In a deflationary period, the value of assets falls, but debt payments become more onerous. At this point, deflation is not a major concern. But the Fed is monitoring conditions.

Q: Aren’t such low rates and policies inflationary?

A: In theory, they can be. But at the moment, inflation is deader than King Tut. The government’s consumer price index fell 1.7% in November, the second-consecutive record decrease.

Q: Will lower rates hurt the U.S. dollar?

A: They did on Tuesday: The dollar weakened against the euro and Japan’s yen. Should those countries lower their interest rates, however, the dollar would likely rebound. Money typically flows to the currencies with the highest interest rates and the greatest safety.

Q: The Fed has never targeted an interest rate range before. Why now?

A: More as a practical matter than anything else. A zero-percent interest rate is hard to achieve. The range gives them a small margin of error. Further, as the Fed has dramatically expanded lending to financial firms and its balance sheet, it has also become harder to manage the funds rate.

Q: Does the Fed have a target in mind for mortgage rates?

A: No, but there’s little doubt that the Fed would like lower mortgage rates, which is why the Fed is considering buying mortgage-backed securities.

If banks can sell their mortgage loans to investors — including the Fed — they will have more money to make new mortgages. A senior Fed official, who would not speak for attribution, told reporters Tuesday that it could be self-defeating for the Fed to set a target for mortgage rates. Instead, the Fed will monitor housing and economic developments to determine future actions.

Q: What does this mean for savers?

A: Lower returns. Rates on bank CDs and money market mutual funds closely follow the fed funds rate. Money funds, which invest in short-term, interest-bearing securities and distribute the income to investors, might be particularly squeezed. The average taxable money fund aimed at individual investors charges 0.86% a year in expenses. Three-month Treasury bills yield 0.03%.

Q: What is the Fed trying to do?

A: The Fed is pulling out all the stops to revive business and consumer lending and get the economy moving. The central bank is particularly focused on the wide difference, or spread, on interest rates between supersafe Treasury bills, for example, and market-based loans for autos, homes and other purchases.

Fed officials think the wide spreads are due to a lack of liquidity, as lenders pull back. They hope that by flooding markets with cash, using such strategies as buying mortgage-backed bonds, they can bring interest rates down and relieve such pressures.

The Fed has so far confined its programs to making loans by using high-grade securities as collateral. It could consider dipping into some riskier markets going forward, but only with backing from the Treasury Department to absorb some losses.

Contributing: Adam Shell and Barbara Hagenbaugh

By Barbara Hagenbaugh and Sue Kirchhoff, USA TODAY

 WASHINGTON — The Federal Reserve is expected to slash a key interest rate to near zero and signal that it will step up its use of other, less conventional methods to bolster the economy, during a historic two-day meeting starting Monday.

Economists expect the Fed’s policymaking Open Market Committee to cut its short-term interest rate target, now at a scant 1%, to a record low of at least 0.5%, or further. The federal funds rate, which banks charge each other for overnight loans, is a benchmark for business and consumer loans.

If the Fed doesn’t push its interest rate target to zero on Tuesday, many economists expect it to do so at its January meeting. Then the Fed will have to experiment with other strategies for pumping money into the economy to spur business activity.

Fed Chairman Ben Bernanke has said options include buying Treasury bonds to push down longer-term interest rates, or stepping up financial support for private consumer and business lenders. For example, mortgage rates fell earlier this month after the Fed said it would buy $500 billion in Fannie Mae and Freddie Mac mortgage bonds.

Richard DeKaser, chief economist of National City, predicts the Fed will cut the target by 0.75 points, to 0.25%, and may announce that it will hold rates low as long as needed in order to influence expectations.

Other economists predict a big rate cut but expect little impact. Banks have pulled back from lending, and consumers are reining in spending. The federal funds rate has already fallen well below the Fed’s 1% target in credit markets. The rate averaged just 0.14% on Thursday, for example. Interest rates on Treasury bonds have also fallen to historic lows as investors snap them up, desperate for a safe investment.

Rates have fallen so far that some money market mutual funds, long seen as safe investments, could shut down or post losses. Some funds already earn less in interest from investments than it costs to run the fund.

Nigel Gault of IHS Global Insight says tax and spending policy will become increasingly important for the economy. President-elect Obama wants Congress to pass an economic stimulus bill in January containing hundreds of billions of dollars in new spending.

“Our central bank is trying to bypass a clogged-up credit system, understanding that in the 1930s one of the things that happened is credit collapsed,” says Allen Sinai of Decision Economics.

New York Times News Service

Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time homebuyers.

Then, everyone who sat on their down-payment savings accounts for a few years too long will kick themselves for not taking advantage of what may turn out to be the buying opportunity of a lifetime for those who can qualify for a mortgage.

Unfortunately, we do not know when this golden age will begin, because we will be able to identify a bottom to the housing market only with the benefit of hindsight.

But as it does with the stock market, the moment will probably arrive when everyone is feeling the most pessimistic.

That moment is certainly getting closer. Housing prices have fallen drastically from their peak levels in many areas of the country. Rates on conventional 30-year fixed-rate mortgages are already close to 5.5 percent, and there has been talk recently that the federal government might try to drive them down to 4.5 percent, a truly incredible figure to be able to lock in for three decades.

Meanwhile, first-time homebuyers have the same advantage they have always had, which is that they do not have to sell their old place before buying a new one. That is an added advantage in areas where many available houses simply are not moving, because the people trying to sell them will not be bidding against you.

If you’re hoping for a recovery in the housing market, you ought to be cheering on the first-time homebuyers. When they purchase homes, their sellers are free to move on or move up, stimulating further sales.

But if you are a potential first-time buyer yourself, or lending or giving the down payment to one, you are probably as frightened as you are tempted by all the “For Sale” signs that have become “On Sale” signs.

So let’s quickly review some of the still-grim pricing data in certain areas — and consider the reasoning offered up by first-time buyers who have forged ahead anyhow.

Think practical

As is always the case with real estate, much depends on location.

One study, “The Changing Prospects for Building Home Equity,” tries to predict where today’s first-time buyers in the 100 biggest metropolitan areas may actually have less home equity by 2012 as a result of continued price declines.

The verdict: Buyers in 33 of the markets could see a decline by 2012, including potential six-figure drops on an average home in the New York City, Los Angeles, San Francisco and Seattle metropolitan areas.

This is obviously scary. It’s worth noting, however, that these predictions came before the government made its most recent move to push down borrowing costs.

Also, the price projections in the study are based, in part, on the fact that the ratio of purchase prices to annual rents is still much higher in many areas than the historical average, when homes sold for roughly 15 times rents.

While past figures may well have some predictive value, I have never been convinced that first-time buyers compare a home that they could own and one that they would rent in purely or even primarily economic terms.

When Jaime and Michael Proman moved this fall to Minneapolis, his hometown, from New York City, they craved a different sort of life after two years together in a 450-square-foot studio apartment that had no room for their wedding gifts. “We didn’t want a sterile apartment feel,” said Michael Proman, who is 28 (his wife is 26). “We wanted something that was permanent and very much a reflection of us.”

The fact is, in many parts of the country there are few if any attractive rentals for people looking to put down roots and enjoy the sort of amenities they may spot on cable television home-improvement shows.

Comparing a rental with a place that you may own seems almost pointless in these situations, especially for those who want to make their own decisions about décor without consulting the landlord.

Still, for anyone feeling the urge to buy, a number of practical considerations have changed in the last year or two. The basics are back, like the idea of spending no more than 28 percent of your pretax income on mortgage payments, taxes and insurance.

Even if a lender does not hold you to this when you go in for pre-approval on a loan, you should hold yourself to it.

You will also want to start now on any credit-score improvement project, because it may take several months to get it above the 720 level that qualifies you for many of the best mortgage rates.

John Ulzheimer, president of consumer education for credit.com, a consumer-credit information and application site, suggests paying down and putting away credit cards starting months before you apply for a home loan.

That is because the FICO credit-scoring system could penalize you if you use a lot of your available credit each month, even if you always pay the bill in full.

Also, check your three credit reports (it’s free) at www.annualcreditreport.com and dispute any errors that may be hurting your score.

Mitigating risk

While no one can easily predict the likelihood of losing a job, the rising unemployment rate suggests the need for caution if you think you might be vulnerable. A.C. Panella, who teaches communications at Pasadena City College in California, waited until she had a tenure-track job before buying a home in Los Angeles with her partner, Amy Goldman, who is a lawyer for a nonprofit organization.

“We could afford the mortgage payment on one salary were something to come up,” said Panella, who is 31. “It’s really about being able to stay within our means.”

For many first-time homebuyers, that philosophy now stretches to the down payment, too. Panella and her partner put down 20 percent when they bought their home in September, as did the Promans when they bought their home in Minneapolis.

Alison Nowak, 29, put just 3 percent down on a Federal Housing Administration-backed loan last month, when she and her partner, Lacey Mamak, bought a $149,900, 800-square-foot home.”Anything that is an opportunity also has a bit of risk,” she said of her house, which had been in foreclosure before a plumber bought it and fixed it up. “One way we mitigated it was that we bought a really tiny house in a very good neighborhood.”

One other risk-mitigation strategy in the coming months might be to buy new instead of used. Ian Shepherdson, chief U.S. economist for the research firm High Frequency Economics, says he believes that a steep drop-off in inventory of new homes is coming soon, thanks to a rapid decrease in homebuilder activity.

Since prices generally soften in the winter, it may make sense to start looking seriously once the mercury bottoms out.

“If you look at new developments next spring, you may not have the choice you thought you would have or be in the bargaining position you thought you would be,” Shepherdson said.

Also, if you wait after June 30, you will miss out on a $7,500 federal tax credit for income-eligible first-time homebuyers that works like an interest-free loan.

Finally, allow yourself to consider how it would feel if you bought and then prices dropped another 10 or 15 percent. It might not bother you at all if you plan to stick around for a while.

Plenty of people seem to be making a longer commitment to their homes than they used to. According to a survey that the National Association of Realtors released last month, typical first-time buyers plan to stay in their home 10 years, up from seven just last year.

Perhaps people are more aware that they will not be able to build equity as rapidly as others did during the real-estate boom years. Or they simply have more confidence in hard, hometown assets right now than they do in other markets.

“We wouldn’t let another decline bother us,” said Proman. “You can never time a bottom. This is a long-term investment for us, and it truly is the best investment we have in our portfolio right now.”

Copyright © 2008 The Seattle Times Company

WASHINGTON (AP) — Government efforts to provide easier credit to consumers and help housing finance companies could push mortgage rates “well below 4 percent,” a federal regulator said Wednesday.

James Lockhart, whose agency oversees government-controlled mortgage giants Fannie Mae and Freddie Mac, made the comments at a meeting of Women in Housing & Finance, an industry group. He did not say how long it would take to achieve such a drop and has declined to provide a firm target for mortgage rates.

Rates fell sharply after the Federal Reserve announced plans late last month to buy up to $600 billion of mortgage-related securities and other debt issued by Fannie, Freddie and the Federal Home Loan Banks. In the two banking days following the Nov. 25 announcement, the national average rate on a 30-year fixed rate mortgages dropped .28 percent, to 5.5 percent, according to financial publisher HSH Associates.

Fannie and Freddie own or guarantee about half of the $11.5 trillion in U.S. outstanding home loan debt.

Neel Kashkari, who heads the Treasury office overseeing the $700 billion bailout of the financial system, told a congressional panel last week that the agency was reviewing a proposal to push mortgage rates down to 4.5 percent.

The government’s efforts to trim mortgage rates are one part of the attempt to reduce record-high foreclosures and loan delinquencies. Other plans include a simplified loan modification program, and interest rate cuts by the Federal Reserve.

Weiss Research Inc. analyst Mike Larson said this week that government attempts to drive down mortgage rates are having some success. “Lower prices in some of the hardest hit markets, and almost irresistible bargains on distressed properties, are also bringing some buyers out of the woodwork,” Larson said.

But lower mortgage rates also could prevent housing prices from dropping as much as they otherwise would. That would mute their effect on the overall economy.

By Broderick Perkins

December 9, 2008

Mortgage interest rates are down to their lowest level in nearly a year, likely to get lower, but just as likely to reverse course at any time.

However, with a rate lock, you could freeze out higher rates or take a gamble on a lower, even more affordable rate.

Here’s the scoop.

Just a week after the Federal Reserve unveiled a $600 billion plan to reduce mortgage interest rates to 4.5 percent for home buyers, the federal gambit appeared to be paying off.

Fixed interest rates (FRMs) on 30-year conforming mortgages dropped nearly a half percentage point to 5.53 percent by Dec. 4, according to Freddie Mac’s weekly survey. The 30-year FRM has not been lower since Jan. 24, 2008, when it was 5.48 percent. The FRM rate last week was also down more than a full percentage point from the 2008 high of 6.63 percent in July.

Even if the Fed’s effort peters out, squeezed by an economy that appears to be resisting jump starts, rates could get lower because the U.S. Treasury Department is weighing in with its own efforts to push rates even lower than 4.5 percent. Unlike the Fed’s program, which targets only homebuyers, the Treasury’s program would include lower interest rates for homeowners who want to refinance.

Still more downward pressure on rates comes from President-elect Barack Obama who has repeated his desire to see more of the existing $700 billion bailout and other funds funneled directly to struggling homeowners.

Lower interest rates can make housing or a refinance more affordable.

A 6 percent interest rate on a $250,000 mortgage costs about $1,500 month in principal and interest; about $1,400 at 5.5 percent and $1,270 at 4.5 percent.

When rates get as low as you need them to go, they could just as quickly reverse course and leave you twisting in the wind — unless you’ve got a contracted mortgage rate lock in your pocket.

Rate locks avoid higher costs

A written and signed mortgage rate lock contract can be your ticket to ride.

Rate locks are typically designed to protect homebuyers from rising rates, but those refinancing for lower rates can also benefit.

A traditional mortgage rate lock is a lender’s guarantee that your mortgage will come with a specific interest rate, points, other costs and terms.

A rate lock’s terms also include a specified period for the lock. The benefits of the lock are only good for as long as the term of the rate lock.

If you fail to complete your home purchase or don’t refinance before the clock runs out, and interest rates rise, you could have to pay any higher costs.

Higher costs can include a higher mortgage rate, more points, and even more up front cash down. More cash down may be necessary to keep the actual amount financed low enough so your monthly payments remain in line with what you can afford or what the lender will allow.

Likewise, if you are refinancing to stave off foreclosure and miss the deadline, you could lose your home if the lender won’t approve you for a higher rate.

In a refinance where your home is not at stake, you’ve got some wiggle room. You can take out less cash, wait out the market or otherwise cope.

Locks can also push costs down

You can also benefit from a rate lock when interest rates are falling.

If interest rates fall during the lock period, you can’t take advantage of the lower rate unless you rewrite the lock at additional cost or initially include a “float down” provision in the original lock.

The “float down” option grants you a lower rate if rates fall within a given window of time. Again, unless otherwise contracted, float down rate locks stick you with the higher rate if rates rise during the lock period.

You may be able to negotiate for a float down that also has a specific rate lock so you don’t pay a higher rate, but you’ll pay through the nose for the lock because the lender is taking on greater risk.

Solid contract necessary to lock or float

Myriad rate lock variations underscore the importance of being sure the language of the lock contract gives you the specific options you need for a sufficient term.

Getting it in all writing removes the potential of trying to enforce a verbal agreement should a dispute arise.

The contract should lock in the interest rate, points and other costs, whenever possible. The agreement should include your name; the lock’s effective date; lock cost; what terms are locked; the lock’s expiration date and time; and any post-lock options.

Lock as soon as you see the desired rate or “on application” — when you first apply for the mortgage — so that your rate is locked as you spend time getting the application approved. That’s particularly important if you barely qualify at today’s rates, and an increase would make buying unaffordable.

Of course, you can choose to set the lock “on approval,” especially in markets where loan application checks are prolonged due to heavy demand for housing or in markets like today’s market of heavily scrutinized applications.

In any event, the lock period should be long enough to allow for settlement, contingencies, and other potential delays. Locks average 30 days, but can range from 15 to 60 days. Obviously, the longer the better, but the longer the more expensive the lock can be.

Devil in the details

• Locks can cost money. Shop around for both the terms of the lock contract and its cost, which varies from lender to lender. Some lenders want up-front lock fees. Others take them at settlement. There are non-refundable fees, flat fees, and fees based on a percentage of the mortgage, and a host of variations.

• Before settling on a lock-in period, determine the average time for loan processing in your market. Ask your lender to estimate the time necessary to process your loan. Verify the information with other realty and mortgage professionals. If the loan doesn’t close on time, lenders can extend your lock for free or charge more.

• Once you lock-in a rate, if you haven’t already, quickly submit the application and other required documents. You should have previously checked your credit report, prepared income, job, debt, asset and other documents to back up your application information. You should also stay in close contact with the lender to be sure the application is progressing quickly.

• Verify the rate lock is from the bank, mortgage lender, credit union or other entity actually writing the loan, not a broker, loan officer or go between. A broker can obtain a rate lock from the lender, but he or she can’t actually write the lock.

• If you have a floater, keep an eye on the market to determine when to grab a rate.

• The Federal Reserve’s”A Consumer’s Guide To Mortgage Lock Ins” offers extensive rate lock information and your local or state mortgage regulatory agency may offer specific rules lenders must follow when granting rate locks.

Last update: 4:38 p.m. EST Dec. 4, 2008

WASHINGTON (MarketWatch) – The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.

The plan would employ Fannie Mae (FNM ) and Freddie Mac ( FRE) to offer mortgages with rates as low as 4.5%, roughly 1 percentage point lower than current rates.

The measure is under consideration as part of the Treasury Department’s continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported Wednesday.

As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.

Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.

It’s unclear whether the proposal would create refinancing opportunities, which analysts said would be even more positive for the beleagured housing industry and battered home buyers.

Conrad DeQuadros, an economist at RDQ Economics in New York, said lower mortgage rates should provide some support to the housing market by allowing cheaper financing to new buyers with solid credit profiles to the housing market. But he added that a greater impact would be felt if the proposal also permitted refinancing opportunities. However, he also expressed some skepticism about the extent of the impact.

“There is still a massive supply of homes on the market and consequent expectations of further declines in home prices may still keep buyers away,” DeQuadros said. “In addition, the weakness in the labor market appears to be intensifying and rising unemployment will depress housing demand and increase delinquencies. As with all of the Fed and Treasury programs, any new plan will have to be given time to work before judgment on its effectiveness can be made.”

Charles Horn, partner at Mayer Brown LLP in Washington, said he believes this program may be part of Treasury Secretary Henry Paulson’s plan to expand a program announced Nov. 25 that would use $20 billion of a $700 billion government market stabilization fund to back a consumer lending facility run by the Federal Reserve Bank of New York.

That plan would seek to provide liquidity to consumer loans such as student loans and credit cards. Paulson said Dec. 1 that he may expand it to other asset classes. “They hope making funds available to offer lower-cost mortgage financing will have a stimulating effect on the mortgage market by getting people to buy homes,” said Horn.

He added that Paulson may be waiting to see how receptive the program might be with key lawmakers such as House Financial Services Committee Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd, D-Conn., before moving ahead with it. Horn added that Paulson is likely seeking the consideration of other key constituencies such as incoming Treasury Secretary Timothy Geithner.

MarketWatch reporter Ruth Mantell in Washington contributed to this report.

Ronald D. Orol is a MarketWatch reporter, based in Washington.