The Federal Reserve’s latest move to limit mortgage interest rates to a healthy level is likely to hurt borrowers who have taken out loans to finance retirement.
The move by the central bank on Monday caps the interest rate on a borrower’s loan at a comfortable level, which is in line with the rates the Fed sets for the economy as a whole.
That will likely put downward pressure on borrowing costs for people who make less than $150,000 a year, according to a Reuters survey of mortgage lenders.
But it won’t make a dent in the number of Americans who are relying on traditional mortgage insurance to pay down their debts.
Rising home prices and a sharp drop in mortgage defaults have prompted lenders to tighten lending standards and increase the costs of loans.
The Fed’s decision on Monday also caps the amount of money a borrower can borrow at a time of high mortgage rates, which makes it less attractive to many.
It’s unclear whether the Fed will ease the caps on interest rates even if interest rates fall, said Andrew Chamberlain, a mortgage strategist at Bank of America Merrill Lynch.
It’s possible that it would take longer for the Fed to ease the rules than it did last year, when the Fed began limiting the amount a borrower could borrow at the same time it increased interest rates.
That means borrowers with lower incomes who can’t make the monthly payments on their mortgages might have to wait longer for loans to get forgiven.
“The sooner that the Fed gets out from under its own policies, the sooner it can get out of the mortgage lending cycle,” said Robert J. Kaplan, an economist at the Mortgage Bankers Association.
“It’s a pretty tight leash on lending.”