MORTGAGE RATES POISED FOR FURTHER DROP

News that the Treasury Department may use Fannie Mae and Freddie Mac's influence on mortgage markets, pushing interest rates on home loans down to 4.5 percent, has raised hopes for a boost in home sales.

The Wall Street Journal reported last week that the Treasury is considering using Fannie, Freddie and other government-sponsored entities to purchase securities backed by mortgages at a price equivalent to a rate of 4.5 percent. That would be a drop of approximately one percent from current rates.

Each one percent reduction in mortgage interest rate gives home buyers about ten percent more purchasing power. That can not only get buyers off the fence, but also prop up home prices.

Stabilizing prices in markets where foreclosures have created a glut of homes for sale would be good for home builders struggling to clear backlogs of inventory. It's unclear if the Treasury plan would also help borrowers refinance, which would also reduce foreclosures.

In a speech last Thursday, Federal Reserve Chairman Ben Bernanke said problems in housing and mortgage markets "have become inextricably intertwined with broader financial and economic developments." Lenders appear to be on track to initiate 2.25 million foreclosures in 2008, compared with less than 1 million a year before the financial crisis, Bernanke said.

Some observers fear that now that news has leaked that the Treasury is considering such a plan, it will hurt home sales because prospective buyers will stay on the sidelines until it is clear whether the government will take further action to bring down mortgage rates.