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Senate Amendment to 2009 Stimulus Bill: 4% Fixed-Rate Mortgage

This article was written by in Real Estate and Home. 39 comments.


Updated March 20, 2009: The stimulus bill is now a law. Read our roundup of the many ways you can benefit.

Without any Republican support, the 2009 stimulus package pushed by President Obama passed the House of Representatives. The bill is now making its way through the Senate, and it won’t come up for a vote without discussion and amendments. A number of likely amendments, proposed by Republicans and Democrats, address housing issues. Housing — specifically, the housing bubble, is considered by many to be the root of the economic downturn.

Here is one of the amendments being considered.

Senate Republicans are likely to introduce a provision that would encourage lenders to offer a 30-year fixed rate mortgage at 4% for a limited period of time. The loans would only be available to credit-worthy home buyers and homeowners seeking to refinance. (CNN)

When housing prices increased the level of affordability for most buyers, people stopped buying houses and prices, on average, stabilized or fell. If this is a root cause of the economic downturn, the necessary correction would involve allowing prices to fall further until reaching a level at which more people were willing to buy. In the mean time, supply would be reduced as home builders continue to slow down production. But this amendment would do the opposite.

Giving more people access to credit will allow people to qualify for bigger mortgages to afford higher-priced houses. This would keep prices inflated. On the other hand, giving people access to more credit will help people feel they are in a better financial position. Economic downturns are partly psychological; good sentiment can go a long way to turn the economy around.

A 30-year fixed-rate mortgage at 4% is a great deal. The difference between the market rate and this benefit would be paid by an addition to the stimulus package. Like the rest of the stimulus, it would be paid through government debt issued mainly to overseas investors.

Updated September 4, 2009 and originally published February 2, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 39 comments… read them below or add one }

avatar tom

Dang… I’m currently refinancing at 4.25% into a 7-year ARM. I know, I know… ARMs are what got us into this in the first place, but we plan to move in 4-5 years anyway. Plus, my company will buy the house from us as part of the relocation package.

4% fixed rate may cause another housing rush just as low rates did many years back. Who’s to say we aren’t blowing another housing bubble?

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avatar Luke Landes ♦127,372 (Platinum)

Tom: That’s quite possible. I would say 4% mortgage rates are gifts to brokers and real estate agents more than consumers. House prices need to fall to levels attainable without mounds of debt. I’m sure the National Association of Realtors would welcome this amendment; it might get their agents working again.

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avatar The Weakonomist

I see the republicans did not learn from their mistakes. They are supposed to be the free market guys. Artificially low mortgage rates will simply allow people to buy more house than they could normally afford. Thusly, the real estate guys that overbuilt will be able to dump their inventory on the taxpayers.

The real winners here will be the wealthy who will be able to buy upsome vacation homes on the cheap. They need to snap out of this quick!

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avatar Matt

@Weakonomist: You missed the whole point of the proposal which makes your concerns moot. The provision restricts these rates to refinancing only:

“The loans would only be available to credit-worthy home buyers and homeowners seeking to refinance. ”

So no one will be able to “buy more house than they could normally afford.” No one will be able to “buy upsome vacation homes on the cheap” either. This doesn’t apply to new purchases, only refinancing.

The idea here is to lower rates on existing owners to avoid more foreclosures. This won’t help anyone offload inventory.

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avatar Adam

Just because they require banks to have 4% fixed rate mortgages does not mean that the banks will issue them. All they would have to say is that the borrower just wasn’t qualified and too bad for them. I am already tired of this new stimulus plan.

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avatar Luke Landes ♦127,372 (Platinum)

Matt: This is the first I’ve heard that the 4% rate would only be available for refinancing. Everything I’ve read indicates that the proposal on the floor is for both new mortgages and refinanced mortgages. Nothing is set in stone until the bill passes, of course, but I haven’t seen anything to indicate that the idea in the Senate only applies to refinances.

In fact, the sentence you quoted indicates clearly that the rate would be “available to credit-worthy home buyers and homeowners seeking to refinance.”

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avatar Weston

Like Adam I also question the practical effect of language like “encourage lenders”. What the heck does that mean?

Also, I understand that 4% would be for a limited term (I read two years). So what happens at the end of the 2 years? Do you have to refi at going rates and thus possibly wipe out alll your savings on the 4% (and possibly more)?

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avatar Luke Landes ♦127,372 (Platinum)

Weston: It sounds like it’s a fixed rate loan, 4% for thirty years. The “limited time” may mean that there is only a small window of availability to initiate a mortgage under this plan, rather than implying that the interest rate is variable and will change after a certain amount of time.

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avatar TwoCents

I believe the idea is to offer the 4% 30 year FIXED until the year 2011. At the end of two years, the offer for 4% is not required to be offered for new financing. Those who have acquired the 4% fixed, before the end of two year time limit, will remain at 4% for the fixed 30 year rate. How can a 30 year fixed be fixed if it is adjustable at the end of the two year offer period. A 30 year fixed can not be adjusted once it is in place.

The language of “encourage lenders” really does not change the current status of refinancing. They could offer a 4% 30 year fixed by having the borrower pay points to obtain it. They need to strengthen the language or change the wording to ‘must offer, with no buy down points’ or some wording to that effect. If there is a loop hole for our money grabbing banking industry to get around offering 4%, without lining their pockets, you can bet they will find and use it.

Just my two cents worth.

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avatar Steve

This is really frustrating. We didn’t buy a house during the bubble, knowing that prices were higher than justified. Now the government is once again taking our money and our children’s money and using it to prop up the overinflated housing market. Ridiculous.

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avatar Jason Kratz

Matt-

You say: ‘So no one will be able to “buy more house than they could normally afford.’. As Flexo pointed out this doesn’t seem to be limited to refinancing. And it is quite possible that a credit-worthy person may decide to overtax themselves because of this. The matter of fact is that right now the same bad lending practices are still happening anyhow which just astounds me. Nobody has learned a damn thing.

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avatar thomas

WIll they pay my closing costs and make sure that I don’t lose all my current equity?

If all goes well I should just be able to quit working all together and live off the government. Why should I work when there a thousands of wealthy people who will support me and my lifestyle?

Please note the sarcasm in my comment. Just another smack in the face of free market economics.

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avatar Rassah

If the rate of inflation goes above %4 (or even less, if other finance-related fees are taken into account), banks holding the %4 notes would be losing money compared to inflation and other investment vehicles. This all reminds me way too much of the inflation that wiped out savings and loans many years ago,

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avatar Luke Landes ♦127,372 (Platinum)

Rassah: The banks wouldn’t have to worry about losing money on these 4% mortgages because the government would make up the difference between the 4% and the market rate.

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avatar Matt SF

I love the debate here, but the real purpose of this plan (at least in my opinion) is NOT to get average folks to buy a new home as their primary residence or refinance (if that’s even possible at this stage of the game).

This is being done primarily to encourage the vulture investors who actually know what they’re doing to buy up the excess inventory.

If the feds are going to help us (e.g. vulture investors) by creating a new 4.0% fixed rate loan, then hooray for us! A 4.0% loan will increase our monthly cash flow margins by a few 100 bucks each month, and allow us to roll those profits quickly into buying additional properties. Sorry to make it sound so nonchalant, but that’s just how this once boring RE market used to work before days of cheap & easy credit sent it on a roller coaster ride.

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avatar fenwah

Actually I’ve read where they will give to HOME BUYERS as well as homeowners wanting to REFINANCE

Create a 4% mortgage: Senate Republicans are likely to introduce a provision that would encourage lenders to offer a 30-year fixed rate mortgage at 4% for a limited period of time. The loans would only be available to credit-worthy home buyers and homeowners seeking to refinance.

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avatar SandraKay

We are scheduled to close escrow on a house in the next couple of weeks. Any idea how quickly the 4% interest rates would be applicable? Would any house purchase in 2009 be eligible? Any info would be appreciated.

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avatar Writer's Coin

Wow. 4% fixed rate? This is perfect timing for my wife and I….we’ve been looking for our first place to buy (that we can afford—no easy task) since last year and right now we feel like we’re in the driver’s seat.

Throw in that kind of a deal and in 20 years we’ll look back and say “We were in the right place at the right time.”

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avatar Alias

Solve the foreclosures by extending the loans by 10 years. This would lower the
payments, financial institutions would collect the same interest, securing the fiancial market,
and people would still be in homes. US Census–average American moves
every 5 years, they will never use the extension, stabilize the markets and
everyone is happy again. Simplistic? Yes. Sometimes simple is the best solution,
and cost the taxpayers nothing.

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avatar Sean

This is bogus info. I feel bad for everyone waiting because someone heard 4% on the grapevine. Remember two months ago when somebody at the treasury whispered 4.5% (http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm)? How’d that work out? Oh that’s right…rates went up. I hope everyone waiting for 4% gets hosed and ends up at 6%.

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avatar CP

Are you folks nuts! I have an average income and I would jump at the chance to refinance at a fixed 4%. I have a 30yr fixed at 5.875%. Refinancing at 4% for 15yrs would allow me to pay my home off years earlier without any increase in my monthly payment, not to mention saving myself over $150K in interest. I am happy with my 5.875 but anyone who thinks a 4% is only for “vulture investors” is a moron.

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avatar DahMan

Why not cancel the $9,000,000,000 bailout. Zero to banks, nada to auto makers and zip to Wall Street. Send an immediate stimulus of $133,000 to every individual or family with a reported IRS net income of less than $133,825.13 last year. No strings attached. Suspend all sales tax for the six months on cars made by Ford, GM and Chrysler.

Show us the money and we will take care of the rest. I’ll pay down my mortgage, buy a new GM vehicle and shop somewhere other than Good Will and WalMart. Trickle up will help the average Joe better than trickle down. It seems when we try the trickle down approach it gets absorbed by the big sponges at the top.

This may also help some of the illegal immigrants in our country but the government could set up a distribution point, hire some of the unemployed and have them check for citizenship before distribution of the funds. At the same time, a sweep of illegal citizens and deportation could take place which, as and end result, would save enough money from welfare, education, health and so forth that we could pay off the national debt in a few years.

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avatar DahMan

Don’t worry folks. We will never see the 4% mortgage or any assistance with reduction or assistance with home loans. That would make too much sense. They will continue to hand out money to the big boys so they can line their pockets, throw more parties and take vacations on your dollar. When the world wide economy becomes this bad, look for World War III. That seems to be a great economic stimulus that has been used in the past to solve economic problems. Unfortunately, with our liberal citizenship we will roll over. You better start learning Chinese.

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avatar DahMan

My house value has dropped from $305,000 to $255,000. How much further do you want them to drop. Unfortunately for me, my first wife died from cancer, my second wife decided she loved my cash more than me and spent $112,000 of my line of credit, while I was out of state, before taking off. I went from owing $95,000 to $212,000. I could not refinance at 4.375% from 5.75% because my home equity dropped so much. With the high gas prices, food costs, increase in utilities costs and decrease in my investments; I do not have enough money to pay the closing costs on a decreased interest rate. And you want my home value to drop more. Thanks.

I agree, wait until my home value drops to $180,000 so the investors can buy it and get rich down the road. I’ll starve before I sell for that little.

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avatar Anonymous

Subsidizing lower mortgage rates would mostly benefit people with sufficient home equity and incomes. Homeowners with the greatest need may not qualify because of equity and debt ratios. Hopefully, the 4% target rate also applies to FHA loans.

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avatar Rules Follower

I will be honest, this seems to be a reward for those who have been playing by the rules and for those who did not take the ARM or interest only mortgages. For months I have been upset with the talk of bailing out those who should not have been given mortgages in the first place. When I took out a mortgage on my house I had a good job with excellent credit so I got a 5.65% 30 year fixed rate mortgage instead of opting for a 5 year ARM or an interest only mortgage and rolling the dice. With all of the talk of dropping the interest rates and subsidising default property owners by dropping the principle amount was upsetting, I felt hey I should have rolled the dice and taken the ARM/Interest only and saved 5 years worth of difference in monthly payments. The 4% does make sense as long as it is administered properly. Make the funds available to new and existing homeowners but make sure that they are qualified by a revised set of standards. Must have a job, provide paperwork, tax returns etc.

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avatar Barry

Many of you are missing the boat. I’m have been promoting this idea for months.
One of the prime reasons we are in this economic mess is the loss of liquidy by the middle class.. there is no money left for the average family to purchase goods or services. A disproportiate share of income now goes to servicing credit. The financial industry went from 808 billion to amost 3 trillion dollars in the five years. These large companies take more and more of family income by raising intrest and increasing fees as a primary goal to increase profitability in that is growing expotentially, Remeber they manufacture or produce nothing salable. They issue credit, process transactions and service your debt. Too many on both ends of the spectrum have gamed the system ( 45% of income growth has gone to less than 1%) on the other side people have been given credit for credit cards, teaser mortgages who never had sufficent income or some never intended to pay their debts. This is a house of cards and an abyss that is tittering on col lapse. I now have a very good mortgage and will likely not benefit from the proposed change. But honestly I believe that if this is adopted, it is fair to all, it does not reward the bad actors, it would stabilize the home values, let more people who are on the margin a greater opportunity to stay in their homes – reduce foreclosures. Also it will provide a steady stream of liquidy to again purchase goods and services. – much better then a one time check.. The average home mortgage will save between $300 – $500 per month.
If you believe this has some merit please add your voice/comments and pass it on to your represenatives.

Thank you in advance

Barry

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avatar Kris

Why do you think this does not apply to home purchases? What part of the term “HOME BUYER” in your quote conveys that it’s only valid for people who refinance?

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avatar Carl Furr

We’ve done all the paperwork and appraisal to try to refinance. Once everything was completed, we’ve been waiting for rates to reach 4.5%(where they were in Dec) in our area. When talk of the 4% government backed mortgage began to circulate, mortgages began a slow climb to 5.25%. I read that the government will make up the difference between the 4% and the prevailing fair market mortgage rate. Does anybody else think they smell a rat here? It seems to me that banks have an incentive to raise 30 yr mortgages in the short run. Why not, as the government will be making up the difference in this spread! There just seems to me like no logical explanation for the increase in mortgage rates the past month. These rates are based on supply/demand and pretty sure that demand is at an all time low.

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avatar Barry

The proposed 4% fixed rate should be limited to primary home morgages only, All homes with<$800,000 assessed tax value All new mortgages <$800,000 would be by application would require an investment ( 10%) down. Be credit worthy and demonstrate and varify sufficient income to support payments. No more for speculation! This is targeted directlty to provide relief to the middle class.

The new fixed rate could easily be implemented – applied in mass across the country – to all mortgages that meet the above critria. If this rate is adopted and stipulated at the federal level. No existing mortgages would need to be re-written or applied for. The financial services industry/banks then could easily implement this change quickly with simple code changes..

I believe this would immediatly give a kick start to the economy and provide a significant boost to middle class household income. Again, it stabilizes home values, reduce foreclosures and re-start consumer spending. = Jobs
If necessary they can use TARP money to initiate this. If anyone can advise me why this concept and idea is not feasable and fair.. I like to hear from you

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avatar bluesbeans

Has the proposed 4% fixed rate mortgage idea been dropped from the Stimulus Package? I was hoping this would be a part of it. I don’t see any mention of it in the last couple of days. Does anybody know if it has been totally dropped? Any info will be greatly appreciated.

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avatar Carl Furr

Yeah, the 4% mortgage idea was dropped late last week. Unfortunate, as I thought it would be a good idea to get people back into real estate. Hopefully, the stimulus bill will get consumer confidence up again and we can start digging out of the recession hole.

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avatar Matt SF

Looks like we’re going to subsidize mortgages instead of refinancing them. News of the plan surfaced today around 3:30 that home owners who can’t pay the full balance on their monthly mortgage payment will receive federal assistance funds. Since 1 in 7 homeowners are underwater, this could be pretty big. Just one more way to screw over the people who played by the rules.

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avatar Karl

No 4% fixed rate mortgage, no $15,000 tax credit for home buyers. What happened? I thought they wanted to fix the economy.

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avatar Barry

Hopefully this home mortgage change “is coming as part of the economic package that is supposed to be revealed shortly” Sec. Treasury said in his testimony this week.

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avatar Mike

I’m in the process of refinancing my 5/1 year ARM (5.5%), into a 30 year fixed rate at 4.875%. I close in a few days. I’m wondering if I should postpone closing until the government releases the details of the housing stimulus plan? If I pay >$2000 to refinance to 4.875%, I’ll be very upset to find out the government has decided to hand out 4.0% mortgages. For these 4.0% mortgages, will people still have to pay closing costs to refinance? Maybe I’ll postpone my closing for a week or so, hopefuly the details of the housing stimulus plan will be revealed by then.

As a side note, of course, I disagree with all the bailouts, and stimulus packages. It all smell of Socialism. This country is based on Capitolism, at least it used to be. Let the big banks and companies fail. Let home prices drop to rock bottom. Home prices are way to over inflated anyway. The economy will correct itself given enough time. Sure times will be tough for a while, but thats life. This country is way to greedy and materialistic. Its time we were set back a few notches. Things are getting out of control. Back to reality.

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avatar Robin

The plan should go a bit further. The government should create 10 year mortgages at 3% for people who haven’t had problems and want to accelerate their payments. In these mortgages, the principle and interest payments would be totally tax deductible. This would greatly stimulate spending in the near term and the government would ultimately increase its tax collections, once people have paid off their mortgages early.

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avatar Barry

I agree with you… I like your idea… I suggest you also promote this to everyone. I believe a cross the board reduction of mortgage rates to 3-4% would be fair to everyone. I have been and promoting this concept with emails to the media, letters to the administration, my senators and my representatives for months. It’s probably just coincidence but at least now, it now appears everyone is coming to the same conclusion- it’s taking hold. Hopefully, this translates to action which every one who has a mortgage and honestly has been making their payments will have the opportunity to benefit.

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avatar steve

we need to have fha and other lenders more 40 and 50 year mortgages this would make homes more affordable, it would really help in california and other high priced areas.NOTE fha does not do 40 or fifty year mortgages. but it has a mortgage calculator that goes that high…

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