Treasury may set mortgage rates at 4.5% to boost sales
By Ronald D. Orol, MarketWatch
Last update: 5:21 p.m. EST Dec. 3, 2008

WASHINGTON (MarketWatch) - The Treasury Department is contemplating a proposal that would cut mortgage rates for new loans for homes, according to the Wall Street Journal.

The plan would employ Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1% lower than current rates.

The measure is under consideration as part of the Treasury Department's continued effort to limit foreclosures, which has been at the core of the financial crisis. The plan would seek to revitalize the financial market without bailing out homeowners and lenders, the Journal reported.
As part of the proposal under consideration, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.
Fannie Mae and Freddie Mac guarantee a significant chunk of all new mortgages in the United States.
It's unclear whether the proposal would create refinancing opportunities, which analysts said would be even more positive for the beleagured housing industry and battered home buyers.
Conrad DeQuadros, an economist at RDQ Economics in New York, said lower mortgage rates should provide some support to the housing market by allowing cheaper financing to new buyers with solid credit profiles to the housing market. But he added that a greater impact would be felt if the proposal also permitted refinancing opportunities. However, he also expressed some skepticism about the extent of the impact.
"There is still a massive supply of homes on the market and consequent expectations of further declines in home prices may still keep buyers away," DeQuadros said. "In addition, the weakness in the labor market appears to be intensifying and rising unemployment will depress housing demand and increase delinquencies. As with all of the Fed and Treasury programs, any new plan will have to be given time to work before judgment on its effectiveness can be made."
Charles Horn, partner at Mayer Brown LLP in Washington, said he believes this program may be part of Treasury Secretary Henry Paulson's plan to expand a program announced Nov. 25 that would use $20 billion of a $700 billion government market stabilization fund to back a consumer lending facility run by the Federal Reserve Bank of New York.
That plan would seek to provide liquidity to consumer loans such as student loans and credit cards. Paulson said Dec. 1 that he may expand it to other asset classes. "They hope making funds available to offer lower-cost mortgage financing will have a stimulating effect on the mortgage market by getting people to buy homes," said Horn.
He added that Paulson may be waiting to see how receptive the program might be with key lawmakers such as House Financial Services Committee Chairman Barney Frank, D-Mass., and Senate Banking Committee Chairman Christopher Dodd, D-Conn., before moving ahead with it. Horn added that Paulson is likely seeking the consideration of other key constituencies such as incoming Treasury Secretary Timothy Geithner.