More Mortgage Help on the Way?

Dec 18, 2008 - Treasury department officials unveiled yet another new plan to a real estate industry trade group that is geared towards improving conditions in the housing market and goes beyond restructuring or modifying existing mortgages for distressed homeowners.    A recovery in the housing market is perceived as critical to injecting confidence back into the financial system and helping to prop up the value of securities which are backed by mortgages.    Under the proposed plan, the Treasury would purchase securities which go specifically towards financing home purchases and as a condition to participate in the program, a mortgage lender would have to establish below market interest rates.  The plan would only apply to purchase loans and not refinances (refinance mortgage rates) which has led some critics to characterize the plan as a de facto bailout of home builders.   Whether or not lower rates would lead to more home purchases remains to be seen, because purchasing a new home is a decision consumers make based on their level of financial confidence (unlike refinancing) and with the job market becoming progressively weaker, it is unclear how many Americans would be inclined to act confidently.  The announcement that this plan was under consideration drew some criticism for being too premature in conception to even warrant announcing as it could unintentionally lead Americans to feel they would be better off waiting to make their purchase decisions until the time when new government programs would apply and could be implemented to their benefit. 

Estimates on the cost of the plan remain unclear but it has been proposed that funds be generated to support the plan through a public bond issuance carrying 3% interest.  The hope is that the government would profit from the plan by purchasing mortgage securities from the various lenders at a rate which is roughly 1.50% higher than the rate of the underlying bonds supporting the plan.  It has been proposed that the securities be channeled through Fannie Mae and Freddie Mac. 

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