Treasury wants to drive mortgage rates to 4.5%
December 3, 2008 – 6:08 pm
Ugh. It’s been a week since Ben and Hank announced plans to pump $600 billion into mortgage-backed securities in order to prop up house prices “revitalize” the housing market. Mortgage rates responded by falling below 6%. But that’s not low enough for Hank, so he’s considering a new plan to bring mortgage rates even lower, to 4.5%. According to an item on Journal website:
The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new home loans, according to people familiar with the matter.
The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.
I wonder: How many more hundreds of billions will Treasury spend buying mortgage-backed securities in order to push rates down to 4.5%? Will this be in addition to the $600 billion of purchases announced last week?
I understand Paulson’s dilemma: the balance sheets of America’s major banks and financial institutions are getting hammered by falling house prices (and the consequent spike in mortgage delinquencies that falling house prices lead to). And yet, it’s pretty clear to anyone that’s taken a look at the big banks’ balance sheets that they are already beyond repair.
To truly “revitalize” housing we must allow prices to fall so that the market clears. Price-fixing doesn’t work. It didn’t work for Nixon in the 70s and it won’t work with interest rates today.
Posted in GSE, bailout, bubble, credit crunch, housing, taxpayer issues |
14 Responses to “Treasury wants to drive mortgage rates to 4.5%”
As a green developer wanting to complete a very positive project I would just like to get a loan at any rate! 2-4-6-8?
When banks tells you that they like the project, our debt load, cash flow, payment history, equity and credit is good and if they get some money in they’ll call us. That’s when I knew things were bad. We were asking for $50k Yikes!
By effenhel on Dec 3, 2008
I want to do my part to revitalize the economy. I want to buy a new house and new furniture for my family of four but the prices are still way up in the sky in Southern California. Would Mr. Paulson and Mr. President please subsidize me $100K so I can afford it. I will down 20% and I can easily meet my monthly obligation.
Best Regards,
A Saver and Renter.
By Jimmy on Dec 4, 2008
Our so-called government leaders are frantically grasping at straws to entice potential buyers back into the real estate market. Don’t they understand that America’s For-Sale real estate inventory has nothing to do with it? People have wised up. It is the ratio of income to home prices that the consumer is watching. Americans with money to invest are waiting for RE values to decline to more reasonable and affordable levels. That’s what I’m doing. The government needs to get out of the way and let it happen. Once our regional RE markets have corrected, our economy can start to heal. Painful yes, but necessary.
By RBHill on Dec 4, 2008
Green Developer get your own Green Bucks. Stop Whining. The free money days are over.
By GreenDeveloperGetYourOwnGreen on Dec 4, 2008
O what a tangled web we weave, when first we seek to subsisidize interest rates:
http://money.cnn.com/2008/12/02/real_estate/mortgage_fraud.ap/index.htm?postversion=patrick.net
4.5% for thirty years - a whole new constituency for inflation above 4.5%
Of course, can Americans figure out that getting more and more of something worth less and less is not a good deal?
By fresno dan on Dec 4, 2008
4.5% won’t help
they’ll have so many restrictions on this program u’ll think u r giving birth to a hippo to close one
plus forget about making any $$ on these deals
they will restrict what u can make
sorry ass politicans have no idea what they r doing
By steve on Dec 4, 2008
wonder where he got that idea?
http://forum.ml-implode.com/viewtopic.php?t=87814&sid=1bfb6dacde94e29772a64d7b6618f1b5
By Dont look now on Dec 4, 2008
Great post.
One of the problems as I see it is that all these reserves that are being pumped into the system are mostly just sitting at the Fed. Why lend them out? The Fed is paying 1% on excess reserves and there is no counterparty/default risk. The effective fed funds rate has been around .2-.3%.
One of the biggest mistakes of the Fed in the Great Depression was to increase reserve ratios at a time when credit was already tight. By choosing to pay interest on excess reserves in September, and subsequently rising the rate until it now stands equal to the targeted fed funds rate, they are esentially doing the same thing. Only this time the banks are doing it voluntarily.
By PM on Dec 4, 2008
In trying to drive the rate to 4.5 they’ll only succeed in driving your American economy straight into the ground. After seeing what you hypocritical war criminal perverts did to Iraq I can only say I along with millions of others pray your country collapses into a heap of dung.
By Voice of Reason on Dec 4, 2008
I saw this post about possible short term losses in home sales of around $4 billion because the news leaked before they came to an agreement.
http://www.vamortgagecenter.com/blog/2008/12/04/4-billion-in-lost-home-sales/
By Michael P on Dec 4, 2008
nobody will buy even the rate goes down to 2.5%, the only way makes the people buy is to let the home price drop to the level that people can afford and the banks feel comfortable to lend again, if this is the case the home price has to drop at least another 50% from this level.
By Ron on Dec 5, 2008
Interest goes up, home prices go down.
Interest does down, home prices go up.
Duh, this won’t help the economy.
The Fed and the Bush gang started the problem and by fixing it, they are making it worse. Leave the housing market alone.
By Jimmy on Dec 5, 2008
I wonder what the ‘real’ purpose of this is?
After all, Paulson can’t be so clueless as to not realize that Americans as a whole are becoming less and less creditworthy–so why dangle the carrot if they know no one will be able to take a bite?
Maybe it’s a way to get more money to the banks on yet another trumped up reason…
By Lisa on Dec 5, 2008