Have we learned nothing? The rise of the 4.5% mortgage

As I walked through the living room just now, I heard talk of a 4.5 percent fixed rate mortgage on Fox News. Financial industry lobbyists are knocking on Hank Paulson’s door at the Treasury Department with a plan in hand to lower interest rates to help “stabilize” the housing market. Will everyone be able to refinance their mortgages at 4.5 percent?

Sure, a 4.5 percent fixed rate for 30 years would be a pretty awesome deal – even for guys like Chris Dodd – but what will be the real cost? Will banks provide mortgages to people who do not qualify simply because the government is, once again, going to back these loans?

From AP writers and the Chicago Tribune…

Under one proposal, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac, Scott Talbott, chief lobbyist at the Financial Services Roundtable, said Wednesday. …

Analysts said that the government could use its ability to borrow money at low rates to in essence flood the market for mortgage-backed securities. This increased demand would tend to push down the yield on mortgage securities sold by Fannie and Freddie, which now average about 5.5 percent because of investor concerns about default risks. Once those yields fall, the theory goes, lower mortgage rates should follow.

That would have two benefits for the economy: Immediately adding money to the pocketbooks of homeowners who can refinance their mortgages and reduce their monthly payments, and eventually help arrest the slide in home prices since much lower mortgage rates would allow more potential buyers to qualify for loans.

“The goal is drive mortgage rates so low that home prices not only stop falling but begin to rebound,” said Greg McBride, senior financial analyst at Bankrate.com.

Wait a second. Brokers lend money to people who can not pay it back. The government says “no problem, sell the loans to the government sponsored entities (GSEs) of Freddie Mac and Fannie Mae” so you have little or risk exposure. The GSEs took the risk and they fell apart.

Now they want the Treasury Department – the federal government – to buy the mortgage-backed securities from the GSEs to free up more cash to lend since nobody has any risk, except for the federal government; and nobody really cares about that.

Man, am I confused.

But wait, the Wall Street Journal (subscription required) is reporting that Treasury is considering offering the program only to people who are buying new homes. No refinance program. Man, that will really get people mad.

Although the original article mentions that it would be a great opportunity for people with a solid income and good credit, who will set the rules? Will a 20 percent down payment be required?

I just get the strong feeling that all of this government involvement manipulating the markets is causing much more havoc than necessary.

Have we learned anything?

Alex Stenback over at Behind the Mortgage has this to say.

Just to be clear, this is not a “plan” that the Treasury hatched, but a poposal being pushed by the Real Estate and Home Building lobbyists.

It remains to be seen whether there is any appetite for this at the Treasury, and the mortgage backed securities market (which is what actually determines mortgage rates) has barely budged.  This tells us, at the very least, that those with actual dollars at stake aren’t convinced the Treasury is poised to act.

As we’ve mentioned many times before, low interest rates in and of themselves are not going to re-inflate home prices, re-ignite demand for another 40 acres of tract homes in every suburb, or put underwater homeowners on dry land.

There is such a thing as too much intervention in these markets, and we’d prefer to see the laundry list of initiatives already enacted given time to work (for that matter, we don’t even know whether whats been done so far is effective) before we line for every half baked “save the [insert major industry], save the world” plan put forth by lobbyists.