Government Thinking Hard About 4.5% Mortgage Plan. Good!

The government is still thinking about getting into the 4.5%-fixed-rate-mortgage business, says the FT:

An intensified effort to exploit government control of Fannie Mae and Freddie Mac to drive down US mortgage costs and cushion a decline in house prices could start soon.

This might begin in the final weeks of the Bush presidency and is likely to continue under Barack Obama’sadministration.

By the time it is over, the US taxpayer could own a large chunk of the US residential mortgage-backed securities market.

The Federal Reserve has already stated its intention to buy $600bn (€449bn, £401bn) of Fannie and Freddie securities and is interested in doing more. Meanwhile, support is building for a plan to offer government-funded 4.5 per cent mortgages for new home purchases that would be sold by banks, securitised by the mortgage giants and sold on to the government.

This proposal – based on an idea by Glenn Hubbard and Christopher Mayer, professors at Columbia University – is being considered by Hank Paulson’s Treasury. Tim Geithner and Lawrence Summers, the president-elect’s economic chiefs, also appear interested.

Mr Paulson may launch a version of the plan, offering 4.5 per cent mortgages for new purchases as a final hurrah before leaving office. [Emph. added]

We approve this message—and would even expand the plan to include refis as well as purchases. The economics of the scheme only works, of course, as long as the yield on the 10-year note starts with a “2”. Then again, a rise in Treasury yields would likely be a sign credit spreads generally were at last returning to normal, which would definitely be a good thing, even if it turned Paulson’s ”last hurrah” into a money loser for the government. . . .

Comments

[Scott Sambucci:]

The question with regard to buyers in the market, is it the price of money or the price of goods (homes) that are constraining housing activity? Couple that with more responsible lending standards and the fixed 4.5% lending rate may have only a marginal affect.

This article (scottsambucci.blogspot...) discusses these effects in more detail.

Fundamentally, interest rates are a reflection of risk and with lower interest rates, wouldn't this require that the 4.5% lending rate only be provided to buyers with the appropriate credit history? I thought that providing mortgage rates at below the buyer's identified risk profile was a main proponent to the current situation.

2008 Dec 17 08:55 AM

[Smalltownba...:]

You are too late. Mortgage rates are currently at 4.625% without this ridiculously ill conceived concept. Mortgage rates are not and have not been the problem with this mess. Lowering rates artificially for buyers does nothing to address the problems which are caused by existing non-performing loans.

We need the government to get out of the way and quit monkeying around with the process. Foreclose on the non-performing loans where the borrower cannot afford what he bought, let the servicers decide if it is worthwhile to modify a loan, and stop the states from offering these silly moratoriums which only make things worse and weaken the financial system further by sharply reducing incomes.

2008 Dec 17 09:36 AM

[xmplary:]

Lenders are generally ahead of all this... I have been getting e-mail from lenders advertising 4.75% as of last week xmplary.blogspot.com/2... and this week already had one stating 4.5% for 30 year fixed. I think this will help, but the problem is buyers are afraid to get into the market when it keeps tanking. When there is an uptick, there will be more willing to get into the market at these low rates.

2008 Dec 17 12:22 PM

[vreporter:]

Who benefits from lower mortgages for new home purchases?
Why do we want to bail out the homebuilders? (By the way, they're not lowering prices to "market" because of this anticipated charity. There's nothing wrong with values of new construction falling!

2008 Dec 18 12:19 AM

[Lemo:]

This plan needs to include a streamline refinance WITHOUT an appraisal for credit worthy refinance homeowners. I have been in the mortgage industry for 15 years and quality homeowners would love the relief of lower rates, but they do not qualify because the value of their home is too low.

2008 Dec 18 07:11 AM

[charlessr:]

the only way this would work is: (1) have it available for refi (2) reduce the extra point and a half for loans over 417K (3) go back to loans for stated income with verifiable assets and good credit for self employed or others who are not on a W2 basis.who have the proper LTV to use their equity or reduce their current rate for these are the small lbusiness owners and professional corporations who are a driving force in the economy .....and when we get some politicians..trade association executives...and media who can discuss the good things in the economy and in industry,,,,,,we will get out of this mess

2008 Dec 18 10:08 AM