Atlanta Real Estate Blog

WASHINGTON -- The Treasury Department is considering a plan to revitalize the U.S. home market that would push down mortgage rates for home loans.

The plan, still in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full percentage point lower than prevailing rates for a standard 30-year fixed-rate mortgage.

Government officials are under pressure to address falling housing prices and mounting foreclosures, which underpin the current financial crisis.  Treasury has struggled for months to devise a plan to ease the strains on borrowers without appearing to bail out homeowners and lenders.

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger mortgages.  They hope it will increase demand for homes and raise home values.  The lower interest rate would be available only to borrowers who are buying a home, not those refinancing a mortgage.

Borrowers would have to qualify for a mortgage guaranteed by Fannie Mae, Freddie Mac or the Federal Housing Administration (FHA).  Those guarantees apply to loans where borrowers can document their income and afford their monthly mortgage payments, steering the government away from backing "risky" loans.

The Treasury Department and the Federal Reserve Board are already working to bring mortgage rates down through a program announced last week.  In this program the Fed will purchase up to $600 billion of debt issued or backed by Fannie Mae and Freddie Mac, along with Ginnie Mae and the regional Federal Home Loan Banks. 

Results

The Mortgage Bankers Association reported Wednesday that this "new program" 

• Helped push down rates on 30-year fixed mortgages, and
• Refinance applications jumped by a record amount.

In this climate, stocks of banks and home builders drew more investor attention Wednesday, helping the Dow Jones Industrial Average rise 172.60 points, or 2.05%, to 8591.69, despite continued bleak economic news in the Federal Reserve's "beige book" survey of regional conditions.

Under the plan the Treasury Department is considering, it would encourage banks to issue new mortgage loans at lower rates by offering to purchase securities underpinning the loans at a price equivalent to the 4.5% rate.

The Treasury Department would fund the purchases by issuing Treasury debt at 3%, suggesting the government could make a profit on the difference.

Impact on Mortgage Rates

The average rate on 30-year fixed-rate mortgages conforming to the standards of Fannie Mae and Freddie Mac was about 5.75% Wednesday, according to HSH Associates, a financial publisher. That's up from about 5.5% Monday, but down from 6% early last week.

A plan such as the Treasury is considering could be good news for banks hit hard by the housing slowdown.  In addition to having the government play the role of guaranteed buyer, financial institutions could pocket fees for making loans to buyers able to afford homes at the lower rates.  That, in turn, could boost the economy and improve the weak outlook for other consumer loans, such as credit cards, that also are weighing heavily on the banking industry's profitability.

Treasury Secretary Henry Paulson

Normally, the rates lenders charge consumers, including home buyers, are determined by the secondary market, in which investors buy mortgages or mortgage-backed securities. Treasury Secretary Henry Paulson views lowering mortgage rates as key to fixing the housing crisis, which he says is at the root of the widespread economic and financial problems.  His solution would be the mortgage-security-buying program announced last week.

In a speech Monday, Treasury Secretary Paulson said  "The most important thing we can do to mitigate foreclosures and progress through the housing correction, is to reduce the cost of mortgage finance, so more families can afford to buy a home and so homeowners can refinance into more affordable mortgages."

Fannie Mae, Freddie Mac, the two firms' regulator and the Department of Housing and Urban Development -- which oversees the FHA -- all declined to comment.  "The Secretary has said repeatedly that we are looking at a number of options to help homeowners," said Treasury Spokeswoman Jennifer Zuccarelli.

Refinancing Applications TRIPLE

On the refinancing front, the Mortgage Bankers Association said its index of refinance applications had tripled, the largest increase since it began tracking this data in 1990.  Applications to purchase homes, which tend to be less sensitive to interest rate movements, also increased, though by a smaller amount.

Application volume remains lower than it was as recently as March.  Last week's numbers are adjusted for a shortened holiday week, which can make comparisons more difficult.  "The key here is whether these lower rates will be sustained," said MBA associate vice president Orawin Velz, noting that the drop in rates following the government takeover of Fannie Mae and Freddie Mac proved to be short-lived.

The Treasury plan is similar to ideas previously floated by the National Association of Realtors and the lobby group for home builders, though it has skeptics.

"I don't think it's the answer to the foreclosure problem because that problem is a combination of negative equity with unemployment," said Mark Zandi, chief economist of Moody's Economy.com.  "Lower rates aren't going to help those homeowners under water refinance or get a job, at least not quickly."

Resolving the housing crisis has been a hurdle for Mr. Paulson, who has been wrestling for months with ways to stem foreclosures.  The Bush administration has supported mostly voluntary efforts to get the mortgage industry to help borrowers in danger of losing their homes and has resisted calls to use taxpayer money to bailout homeowners.  Those voluntary efforts have had only a limited impact as home prices continue to fall and the number of foreclosures hit record numbers. ( It is very unlikely that, if you are in the foreclosure process NOW, or soon will be, any "new program" will help you save your home in time.)

The administration has been split about its approach, with Federal Deposit Insurance Corp. Chairman Sheila Bair floating a proposal to use $24 billion from the government's $700 billion financial rescue fund to provide a federal guarantee on roughly two million modified mortgages.

Her plan was a hit with Democrats and some Republicans on Capitol Hill, but fell flat with the White House, where some speculated the FDIC plan could cost $70 billion to $80 billion.  Mr. Paulson has expressed reservations about the plan on the ground that it would spend taxpayer money, instead of investing it. Treasury staff have been working on a plan to improve Ms. Bair's model, but Mr. Paulson has so far resisted implementing it over concerns that it costs too much and might not be very effective.

Resolving the crisis is likely to fall to Mr. Obama.  Mr. Obama reiterated his position on Wednesday, saying, "We've got to start helping homeowners in a serious way, prevent foreclosures."  Some Treasury officials are frustrated that the Obama team has not provided more specifics about what it would like the Treasury to do to help homeowners.

Tags: 4.5% Mortgage rates, FHA, Treasury Department, Henry Paulson, FDIC, mortgage refinance, mortgage-security-buying program, mortgage-backed securities, homeowner bailout, home values, modified mortgages, refi, foreclosures, Fannie Mae, Freddie Mac