Thursday, December 04, 2008

Treasury Weighs Possible Mortgage Rate Reduction

The Treasury is strongly considering taking action on mortgage rates. The Treasury Department will probably intervene directly in the mortgage industry to radically force down rates and stimulate the declining housing market. What is being speculated is that the Treasury would offer to buy securities that finance newly issued loans for home purchases. The caveat is that to participate in the Treasury's program, mortgage lenders would have to set extraordinarily low interest rates, for instance, no more than 4.5 percent for traditional, 30-year fixed-rate loans.

These securities would be purchased mainly from Fannie Mae and Freddie Mac, the financing giants that buy most mortgages from U.S. lenders. The price tag for this ambitious plan and the source of funding is up in the air. One option would be for the Treasury to raise money by issuing bonds to the public at 3 percent interest. This would allow the government to turn a profit because it would be buying securities that pay 4.5 percent.

The plan has not been finalized, but I think there is a good chance it will go forward. Democratic lawmakers who will soon have sizable majorities in the House and Senate, as well as the White House have been advocating for a similar plan.

Recovery in the housing market is key to solving the financial crisis.

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