Let's Use the 30-Year Treasury Bond to Reignite the Mortgage Market

As I look at my Bloomberg screen, with just under 1 hour to the FOMC interest rate announcement, the 30 year Treasury bond is selling at a yield to maturity of 2.93%. Why don’t we use the 30 year Treasury to finance the mortgage market?

It would be very simple to construct. The US Treasury offers loans to banks at 50 basis points above the 30 year at issuance to those who are willing to make mortgage loans. That would now be 3.43%. Then the banks would lend to qualified – that is, qualified in the traditional sense and not by the 2005, 2006 or 2007 definition – borrowers at 100 basis points over the fixed rate loan from the Treasury. The banks would then pledge the mortgages back to the Treasury as collateral for the loans. To top it off, let the mortgages be portable and allow homeowners to roll it from one property to another as long as they sell the first property and the second property is worth at least what the initial property was worth. No need for mortgage brokers or mortgage backed securities.

By doing this we would be getting mortgage money to those who need and qualify for it at record low rates. This would help to clear out existing unsold homes and spur new home construction.

Comments

[Louis Chris...:]

I have been trying to promote this idea on Change.org, it's the single best thing the government could do to help the economy.
You can see my outline below and see how this would affect mortgage payments.

www.change.org/ideas/v...

2008 Dec 16 07:24 PM

[Dean Gorenflo:]

I actually think that bringing back the 30 year bond is a contributing factor to the mess we are in. Let's retire this thing once and for all. If a ten year note or an MBS is your choice, you would see a lot more interest in MBS. We don't need to reinvent the wheel here...there are more simple solutions.

2008 Dec 16 08:02 PM

[AlexR:]

Low interest rates don't help too much if buyers are scared at the prospect of a potential loss from continuing price drops (people have a tendency to extrapolate). We need the Fed to start selling Puts on the Case-Shiller housing index. Then encourage banks to purchase these Puts and bundle them into "safe mortgages" which automatically reduce the principal by some amount if the homebuyers' regional market drops further over the first 3-5 years of the mortgage.

2008 Dec 16 10:49 PM

[jahowle:]

The government needs to explicitly guarantee Fannie and Freddie's debt and call all the callable high coupon paper and replace it with Treasuries or Treasury collateralized securities like the FICO and REFCO bonds issued in the 80's for the S&L bailout. Lowering Fannie and Freddie's funding cost will quickly and efficiently lower rates and therefore adding to real estate transactions by reducing borrowing cost.

2008 Dec 16 11:50 PM

[RatWatcher:]

'By doing this we would be getting mortgage money to those who need and qualify for it at record low rates.'

Sounded good up to the word 'need'. Everyone would like this loan....who 'needs' one? Only those who over-reached? Only those actually in foreclosure or on the brink? Or is it only for new purchases? Who determines the winners?

2008 Dec 17 12:06 AM

[Louis Chris...:]

What would be wrong with anyone and everyone being able to apply for a lower interest rate loan? During the eighties, I thought for a long time that if we could market 10% fixed loans, I would be on easy street, I guess it's just relative to the era, the reaction I often get when I bring up the subject of 3.5% fixed rates, is why should we offer that low of a rate, as if it's a government give away, it's not. If an investor can earn more, if the Treasury instrument is going to used to fund mortgages, why not?


On Dec 17 12:06 AM RatWatcher wrote:

> 'By doing this we would be getting mortgage money to those who need
> and qualify for it at record low rates.'
>
> Sounded good up to the word 'need'. Everyone would like this loan....who
> 'needs' one? Only those who over-reached? Only those actually in
> foreclosure or on the brink? Or is it only for new purchases?
> Who determines the winners?

2008 Dec 17 01:01 AM

[joey balls:]

I agree with the idea. One of the reasons that it probably won't succeed is this quote from your article:

"No need for mortgage brokers "

The intense amount of lobbying and back room maneuvering from this group would never allow a program to be established that would make them worthless.

Again, I still agree with the premise of your article. Bravo,

2008 Dec 17 08:39 AM

[John Preston:]

The idea of "portable mortgages" is not new....periodically, it gets some publicity, and then fades to black.....no one really needs this...it sounds great, but is not practical int eh real world...where we all have to play....Besides, mortgage money is not really priced on a 30 year model....mortgage money is priced on

Extremely low rates matter only if there is no wage growth....or asset appreciation.....if you want to keep your salary fixed for 30 years...go for it...

Lastly, blaming mortgage brokers for the current problems is like blaming the cabbie who drives you to the airport...and things get messed up....you fly to LA and your baggage ends up in NY....good or bad, in personal financial sales, individual contact is a vital part of the process...until the actual providers are wiilling to staff the nation, intermediaries will be needed.....and yes...there are bad cabbies and bad mortgage brokers and bad...what ever it is you (the reader) do....

2008 Dec 17 09:29 AM

[Left Coast ...:]

This continues to be one of the best ideas out there because:

1) it deals with lowering the monthly houisng costs of individuals & families,
2) on a market basis, the lower costs will get the markets closer to healthy median income to home price ratios.
3) It would reward those who honor their debt obligations, and
4) it would defrost the credit markets.

2008 Dec 17 11:30 AM

[Todd Cuffaro:]

After 37 years in this business and having been an institution's chief lending officer, I'm amazed at the lack of proven, fundamental solutions being utilized. With supportive help from the government, private markets doled out consequences, both good and bad, and worked to correct the '75, '80 and '92 markets.

The only difference in today's cycle is the promise by the government to socialize risk. If the government promises reimbursement tomorrow, why would institutions deal with borrowers today?

These may have been good (or self-serving) intentions by politicians, but the elections are over, and it's time to allow the market to correct. History has taught us more than once that an economy cannot be influenced by "pushing on a string", and as such, today's market cries out for leadership more than any other I've experienced.

The saddest recognition today is that Chauncey Gardner is at the head of the class for logic and reason. There will always be a need for pruning, and a promise of reward for the greed of both borrowers and lenders will only postpone a true correction.

History taught us that Jimmy Carter's failed attempt to correct StagFlation by flooding the market with printed dollars will, without question, force our economy into another unnecessarily-high inflationary period. Today we are flooding the market with "Bailout" money in excess of $1 TRILLION, all from the printing presses. Adding insult to injury, the money is not being used to ease the credit crunch, but is being used to "deleverage" these companies' liabilities. The companies have become the borrowers in this inverted disintermediation model.

This lack of leadership hurts the most vulnerable in our society two-fold, by first cutting fixed income recipient's purchasing power with inflation, and secondly by barring these same people from credit with the inevitable 18% prime rate needed to correct the problem.

2008 Dec 17 07:58 PM