The federal government is considering a plan to push mortgage rates down to 4.5%

House on rate chart

It all depends on whether the U.S. Treasury Department proceeds with a plan to drive mortgage rates down to an incredibly low 4.5% for at least some borrowers.

And if it does, who might qualify for such a loan?

We've been waiting to find out since early December, when a top Treasury official acknowledged this was one of several options being considered to boost housing prices.

Unnamed sources quoted in several reports said the rate would apply only to 30-year, fixed-rate mortgages.

While the cheap loans undoubtedly would be offered to home buyers, it's not clear whether they'd be available to all home buyers, because we haven't seen what the eligibility requirements might be.

More importantly, it's not clear whether existing homeowners would be allowed to refinance into 4.5% loans. Many reports say they wouldn't be.

But if those unnamed sources are wrong, homeowners rushing to knock hundreds of dollars a month off their mortgage payments could turn this into the biggest refinancing boom in history.

The Treasury Department has spent months searching for a solution to reverse sagging home prices and skyrocketing foreclosure rates.

The option that has everyone talking would take advantage of the unusually low interest rates the government currently is paying to borrow money through Treasury bills.

The plan could work something like this: The government would raise billions of dollars by selling Treasury bills that pay the investors who buy them about 2.5%.

It would use that money to purchase mortgages from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which already buy about 70% of the home loans made by banks and mortgage companies in this country.

Those two, big, government-owned companies keep some of that debt and sell the rest to big investors, usually mutual funds and foreign governments. Right now, those investors expect to earn an average of about 6% on the 30-year, fixed-rate mortgages they buy.

But if the federal government jumped in and offered to buy hundreds of thousands of 4.5% loans, it would create a market for lenders to make 4.5% loans -- the best deal consumers have seen since the 1960s.

In dollars-and-cents terms, a 4.5% loan would save you about $88 a month for every $100,000 borrowed, using the current average rate for 30-year, fixed-rate mortgages. That was 5.33% in our latest survey of major lenders taken Jan. 7.

It's unlikely the cut-rate loans will be offered through a special program or require a special application process.

Borrowers would apply through a bank or mortgage company, much as they do for any conventional loan. They'd receive the special rate if they meet whatever the requirements might be for everything from down payments to their debt-to-income ratios.

In an ideal world, the eligibility requirements won't be any stricter than those currently used by Freddie Mac and Fannie Mae, which virtually every lender already follows.

But even that would make it hard, if not impossible, for borrowers to qualify if they have bad credit (think credit scores below 700), lots of debt or no down payment. It will not help homeowners who are in financial trouble and facing foreclosure.

"It's not going to be a trivial number of people who are rejected," said Jack Guttentag, finance professor emeritus of the Wharton School of the University of Pennsylvania. "The flexible programs people relied on before are all gone."

So, what are mortgage brokers and loan officers telling customers to do while waiting for word from Washington?

Kevin Mathews, a mortgage broker at Mathews Mortgage near Sacramento, Calif., has advised several dozen clients not to lock in rates until the plan is announced.

"I personally believe in waiting it out," says Mathews, who works in an area where housing sales have lagged. "I am convinced it's pretty much going to go down, and that's going to save my clients money."

Other mortgage brokers say customers should go ahead with their applications because the Treasury plan is just that, a plan that may not happen and that they may not qualify for.

Besides, they say, mortgage rates are already quite low.

Our extensive database of the best mortgage rates shows many lenders offering borrowers with good credit 30-year, fixed-rate loans for as little as 5% with fees of $1,000 or less.

Anytime you can get a mortgage for less than 6.5%, you're getting a good deal. So these rates fall into the category of great deals.

"Strike while the iron's hot," says Marc Savitt, president of the National Association of Mortgage Brokers. "You don't know what the future holds."

Mike McDermott, a mortgage broker at M.K.T. Mortgage LLC near Houston, cautioned buyers that more government investment into Fannie Mae and Freddie Mac won't guarantee mortgage rates will plummet. The mortgage rates may not reach as low as the speculative 4.5%, he said.

Another warning: Mark Collins, chief executive officer of Tampa-based America's Mortgage Broker LLC, said low mortgage rates can prompt sellers to raise prices because they'll have more buyers. His company, which covers 27 states, has suggested people start taking advantage of rates as soon as possible.

"No one knows the details of anything yet, and they don't know what benefits they are going to get out of this," he said.

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