Thursday, December 04, 2008

Treasury to Intervene in Mortgage Market

This is not particularly good news.
The Treasury Department is strongly considering a plan to intervene directly in the mortgage industry to dramatically force down rates and stimulate the moribund housing market, according to sources familiar with the proposal.

Under the initiative, the Treasury would offer to buy securities that finance newly issued loans for home purchases, according to the sources. But to participate in the government's program, mortgage lenders would have to set exceptionally low interest rates, for instance, no more than 4.5 percent for traditional, 30-year fixed-rate loans.

These securities would be purchased primarily from Fannie Mae and Freddie Mac, the financing giants that buy most mortgages from U.S. lenders, according to sources who spoke on condition of anonymity because the plan has not been finalized.

The cost of the plan and source of funding remain unclear. One possibility is for the Treasury to raise money by issuing bonds to the public at 3 percent interest. This could allow the government to turn a profit because it would be buying securities that pay 4.5 percent.

At a meeting attended by the Treasury's Interim Assistant Secretary for Financial Stability Neel Kashkari and the National Association of Realtors in mid-November, senior Treasury officials said they were optimistic that subsidizing lower mortgage rates with taxpayer dollars would help revive the housing market, sources said.
Forgive me for being dense, but isn't that essentially what Fannie Mae and Freddie Mac did so poorly that they failed and had to be bailed out. What makes the Treasury think they can do any better.

So yet another intervention into the marketplace by the govnernment, without funding, subsidized and guaranteed by tax payer dollars. How is this going to help home ownership? In addition to the lower interest rates, which is a good thing, what other requirements will Treasury put on mortgage lenders? Will there be stupid rules regarding diversity despite credit risk? Will there be rules regarding any prudent steps that banks should take or will the government overrule good business sense.

Not a good move at all.

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