Interest rates on home loans and other types of consumer debt fell Tuesday after the U.S. Treasury and Federal Reserve announced two important billion-dollar initiatives to support consumer and small-business lending.
The drop in mortgage rates was the largest one-day decline in seven years. The new government initiatives, collectively worth $800 billion, are intended to revitalize the U.S. economy by unfreezing the nation's credit markets. Healthy lenders and loan markets are crucial to help the economy steer away from a recession. The new initiatives could also help to strengthen the nation's housing markets.
Specifically, the Federal Reserve announced a $600 billion program to buy home loan-backed securities (also called mortgage-backed securities). The U.S. Treasury announced a $200 billion program to lend money to investors who own securities backed by consumer loans, including student loans, car loans and credit cards.
Treasury Secretary Henry Paulson said the new loan program would help lenders make more consumer and small-business loans, thus giving consumers and small businesses much needed access to lower-cost loans.
A Federal Reserve statement said the mortgage-backed securities program could "reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally."
"Nothing is more important to getting through this housing correction than the availability of mortgage finance," Paulson noted.
The new initiatives may have gotten off to a good start as mortgage rates dropped sharply on Tuesday. The average interest rate on a 30-year fixed-rate mortgage hit a 10-month low of 5.625 percent. That's good news for prospective home buyers and current homeowners who want to refinance an existing mortgage. Lower interest rates on existing adjustable-rate mortgages also could help some homeowners avoid foreclosure.
Of course, interest rates fluctuate daily, so it's impossible to predict whether these low rates will continue throughout the rest of this year or into next year. Borrowers should take heed and take action now before rates increase again.