Wednesday, December 3, 2008

Paulson Plans 4.5% Mortgages

The Government unveils it’s latest plan to prop up home prices…

The Wall Street Journal reports Treasury Considers Plan to Stem Home-Price Decline

WASHINGTON -- 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.

As a counter-point….The Wall Street Journal runs this story alongside it: Lower Mortgage Rates Are Not the Answer

Lower mortgage rates can help people buy housing, but only if they feel secure enough in their jobs, and confident enough in their financial future to take the plunge. Given that consumers are drowning in debt -- especially housing debt -- fearful of layoffs, and waiting for housing prices to hit bottom, it's unlikely that they'll react to this initiative with a spending spree.

Consumers don't react to debt like companies, though the government is behaving like they do. Giving companies better access to credit allows them to meet payrolls while they adjust their production and expenses in response to tighter economic condition. But families who can't pay their bills can't lay off a spouse and kids. For them, debt grows from burdensome to monstrous as interest charges accumulate. Eventually, the load becomes overwhelming.

As painful as this deflation is to those who are forced to sell, in the long run, lower home prices will help family budgets to come into balance, and personal debt levels to become more manageable. That will help the economy far more than trying to entice tapped-out consumers to buy bigger houses and more stuff.