TOPICS > Economy

Treasury Considers New Plan to Push Mortgage Rates Lower, Boost Home Sales

December 4, 2008 at 6:15 PM EDT
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In an effort to boost the economy, Treasury Department officials are considering a plan to push mortgage rates lower. Reporters and analysts weigh the pros and cons of such a move.

RAY SUAREZ: Now, a second big economy story, new government efforts in the works to help kick-start the housing market. Jeffrey Brown has more.

JEFFREY BROWN: Since the financial crisis began, there’s been near universal acknowledgement that at its heart was a crisis in the housing market and that solving that problem is a key to solving the much larger one.

Federal Reserve Chairman Ben Bernanke spoke of his concerns at a Fed conference this morning.

BEN BERNANKE, Federal Reserve Chairman: The housing market remains central to the economic and financial challenges that we face. Because housing and mortgage markets are tightly interlinked with the rest of the economy, actions to strengthen financial markets and the broader economy are also important ways to address housing issues.

By the same token, steps that stabilize the housing market will help to stabilize the economy, as well.

JEFFREY BROWN: Bernanke’s talk came amid published reports that the Treasury Department is now studying a new plan to push mortgage rates dramatically lower, to 4.5 percent, to stimulate the housing market.

Deborah Solomon co-wrote one of those reports in the Wall Street Journal” and joins us now. Also with us is Susan Wachter, professor of real estate and finance at the Wharton School at the University of Pennsylvania.

Deborah Solomon, tell us more about how this would work. The Treasury can’t command mortgage rates to fall, so how would it try to push them in that direction?

DEBORAH SOLOMON, Wall Street Journal: Right, they can’t do anything but try to encourage banks to make loans at lower rates. And the way they would do that is essentially guaranteeing that they would buy the securities that underlie the loans at a price that’s equal to about 4.5 percent.

So, in other words, they would give the banks the comfort that, if they make loans at 4.5 percent, the Treasury is going to be there to buy those securities that underlie those loans.

JEFFREY BROWN: And this would be through Fannie and Freddie Mac, right?

DEBORAH SOLOMON: Well, actually, no. Treasury is probably going to buy these securities themselves. The way Fannie and Freddie come into this is that they’re only going to buy securities that back loans that are guaranteed by either Fannie, Freddie, or the Federal Housing Administration.

And that’s important, because those loans basically are made to borrowers who can document their income, who can show that they can afford to pay their monthly payments, so that the government isn’t backing risky loans.

Treasury plan a 'housing stimulus'

Deborah Solomon
Wall Street Journal
This is not a plan that's meant to help with foreclosure mitigation, to help people who are about to lose their homes. Treasury says it's working on other programs that would potentially help that.

JEFFREY BROWN: OK. Now, Susan Wachter, so how would this help? Is there a sense out there that there are a lot of people waiting to buy a house or to perhaps buy a bigger house?

SUSAN WACHTER, Wharton School, University of Pennsylvania: Oh, there always are people who need to purchase. And today, financing is difficult, and this would help, because it would lower the cost of home ownership significantly. Whether it would be enough to send price declines is another question.

JEFFREY BROWN: What do you mean? What question is there?

SUSAN WACHTER: Well, the problem is that there are major forces that are going in the other direction, the recession itself, increasing unemployment, and also negative equity itself are leading to more and more homes coming on to the market through the foreclosure process. So that's causing prices to decline. This would help counter that.

JEFFREY BROWN: Well, Deborah Solomon, almost as interesting as what it does is what it would not do. For example, this would not apply to refinancing, correct?

DEBORAH SOLOMON: Right. That's right.

JEFFREY BROWN: And why not?

DEBORAH SOLOMON: Well, there are two things going on here. I mean, Treasury has multiple plans that they're working on. This is one of them. This is not a plan that's meant to help with foreclosure mitigation, to help people who are about to lose their homes. Treasury says it's working on other programs that would potentially help that.

What this is, is a housing stimulus plan. And they feel that this is the best way to help get through that inventory that Susan was just talking about, to plow through that, to create demand for houses, and to help bring housing prices down.

And that, if you do that, you're actually going to help people who are potentially going to face foreclosure, because you'll bring housing prices up. People will no longer have negative equity in their homes, and that could prevent some people from facing foreclosure.

But this is not their foreclosure mitigation plan; that we have yet to see.

JEFFREY BROWN: Though, on refinancing, again, specifically, of course, refinancing would put more money in people's pockets, but that's not what this is intended to do?

DEBORAH SOLOMON: No. I mean, there are, what, 55 million people out there. This would just be too gigantic of a program if the government was going to do that.

I mean, the government plans -- if they do this, they plan to fund it by basically selling debt. So it's taxpayer money. And if they were to do that, it would just be an enormous undertaking. So they're targeting this just at new homes, new purchases.

Separate plan for foreclosures

Susan Wachter
Wharton School of Business
So we really have to do something about this wave of foreclosures, up to 2 million or more under current conditions, and conditions, of course, are worsening.

JEFFREY BROWN: So, Susan Wachter, on the foreclosure issue, which, again, is not addressed here, at least not addressed directly, we did hear Ben Bernanke talk about it today earlier in our news summary. Why not address that head on through a program like this?

SUSAN WACHTER: Well, there are different needs. This is a useful program, but there really is a separate need to address homeowners who are facing -- the only alternative they have is to foreclose on their homes. They can't make the payments, these payments that are spiking as we speak, and they can't sell their homes for anything that's -- well, they can sell their home for less than their mortgage, so there is no alternative but to walk away.

And, of course, that's not only hurting them and the neighborhoods; it's also hurting the overall housing market, leading to prices declining and others then who don't have the option to sell.

So we really have to do something about this wave of foreclosures, up to 2 million or more under current conditions, and conditions, of course, are worsening. This does not do that. It doesn't mean that this isn't helpful; it will be helpful. But it doesn't directly take on the problem.

JEFFREY BROWN: Let me stay with you. Is there a danger here, I wonder, in artificially lowering interest rates to the degree this does before prices have fallen to a place where at least some people think they need to fall to?

SUSAN WACHTER: Well, of course, you know, there's no such thing as the price of housing in America. There are separate markets.

But, actually, there's a great danger that we are going to overshoot on the downside, just like we did a great deal of overshooting on the upside. So it doesn't -- so the markets don't necessarily equilibrate.

And the problem today is that we have excess foreclosures, foreclosures that are happening that should not be happening from the perspective of the homeowner or the investor. So that's why we need to directly address that issue.

JEFFREY BROWN: And, Deborah Solomon, same question. Is that the kind of discussion being held, as far as you know, in Treasury about any potential downsides to a plan like this?

DEBORAH SOLOMON: Well, I mean, I think there's concern about an overcorrection, as Susan mentioned. I think right now what their main concern is, they want to put a bottom on housing prices.

And, yes, there's concern about artificially stopping a necessary correction, but I think everybody agrees, you know, within the government that you need to do something to stem the decline in houses, because otherwise it's sort of this vicious cycle, where falling house prices beget more foreclosures, and you're never going to get out of this economic slump if you continue to let that happen.

Homebuyers may wait for deals

Deborah Solomon
Wall Street Journal
There are some estimates that you could help out 1.5 million to 2 million homeowners.

JEFFREY BROWN: And, Deborah, what about costs here? Now, we've heard -- you know, Secretary Paulson has said many times that he does not want to include a housing plan as part of that $700 billion rescue plan. Any sense of the cost involved in a plan like this?

DEBORAH SOLOMON: There's no sense. I mean, basically there are some estimates that you could help out 1.5 million to 2 million homeowners. Treasury plans to finance this by selling debt at about 3 percent.

It wouldn't be an enormous cost. And what Paulson has said is that he doesn't want to finance direct expenditures through the $700 billion rescue program, but Treasury sees this as an investment, because if you're financing this at 3 percent, and your interest rate is at 4.5 percent, you could potentially make a profit on that spread.

JEFFREY BROWN: Professor Wachter, there's at least one more interesting thing here that -- in the sense that a plan like this gets leaked, perhaps as a trial balloon, and I wonder if there is now a perverse impact from that, in the sense that anybody thinking of buying a house might say, "Well, wait a minute, a plan like this might be coming through at some point. I might get a lower rate," and therefore they'd stop.

SUSAN WACHTER: Sure does. Sure does. There's a kind of a "whoa" effect. Let's wait and see if we can get a loan at 100 basis points less. So it's not all upside to leak such plans.

Plan details yet to be finalized

Susan Wachter
Wharton School of Business
Last week's plan is working. Hopefully, this will be on the table soon, as well.

JEFFREY BROWN: Well, Deborah Solomon, you wrote the story. I mean, is there awareness of where -- we're sort of in a limbo at this point?

DEBORAH SOLOMON: Well, I mean, I've got to tell you, Treasury was not happy about the fact that we found out about this, so it was not a leak from the government.

But, you know, there's awareness, yes. I mean, there's very much concern about market destabilization and having rumors out there.

That said, everybody expects the government to eventually do something about housing, including prices and foreclosures. So I think, you know, people are sort of sitting on the sidelines and waiting for something to happen.

I think a plan like this, you're right, may force their hand now that people know it's out there. But that could be said about all these other plans that are floating around there, too. People are waiting for something to happen.

JEFFREY BROWN: So, Deborah, do you think -- is this now no longer an "if" but a "when" at this point?

DEBORAH SOLOMON: No. I mean, I think they're going to do something, but I don't know that this is going to be the plan that they do. I think they're still debating it.

JEFFREY BROWN: All right. Oh, go ahead. Go ahead.

SUSAN WACHTER: And, remember, last week we had a plan. We had the Fannie-Freddie plan that is working already. Applications are up substantially, and mortgage rates are down.

So last week's plan is working. Hopefully, this will be on the table soon, as well.

JEFFREY BROWN: All right, Susan Wachter and Deborah Solomon, thanks both very much.