According to a report in the Wall Street Journal, the Treasury Department is considering a plan to reduce mortgage rates on loans for home financing to 4.5%. On Thursday, Federal Reserve Chairman Ben Bernanke urged the government to consider sweeping steps to prevent foreclosures, including buying risky home loans and mortgage refinancing them under more favorable terms to homeowners. Prices on mortgage loan securities, which would most feel the impact of any such moves, barely budged on either development. Many mortgage insiders are concerned because the newly released financing plans are simply considered to be another temporary fix that likely would not be the solution to the housing and foreclosure crisis.
Last week, the Fed agreed to buy $600 billion worth of mortgage loan securities, guaranteed by Fannie Mae and Freddie Mac, and agency debt in an effort to prop up the home loan market. That helped bring mortgage rates down nearly one-half of a percentage point. The latest plans lack crucial details on how they would actually work. For example, it’s not clear in a slowing economy if there will be enough qualified buyers who will actually risk buying a home when they are uncertain about their jobs and the value of the home they buy. “People are confused about the plans,” said Kevin Cavin, mortgage strategist at FTN Financial.
Another issue, he said, is that Treasury’s plan would only help new home buyers, not those who need to refinance existing home loans. That could be impractical to implement, as well as unfair, to those homeowners stuck with mortgage loans at higher rates. “How can you separate purchase borrowers from refinance borrowers in terms of mortgage rates?” Mr. Cavin said. If the government directly buys loans extended for home purchases, it will create a two-tier market, said Mahesh Swaminathan, mortgage strategist at Credit Suisse. Refinancings “will occur in the regular market and possibly at higher rates,” he said. FHA mortgage refinancing has been supporting most of the loan programs designed to stem the foreclosure crisis. Steve Park of Mortgage Brokers Network said, “FHA home loan programs have become Main Street for brokers and lenders nationally. Park continued, “The good news is that any bit of lower rates will help everyone.”
Even though government intervention is clearly necessary, some market participants are worried that if it is prolonged it could have a disruptive impact on markets, since they would no longer be establishing fair value. “While reducing mortgage rates is a key goal, it should not destroy the market’s ability to function on its own,” said Mr. Swaminathan. “Government purchases cannot be the permanent solution.” Yet another twist is that it is unclear whether these proposals will be altered or even suspended when the Obama administration takes over in January. But the urgency to address the housing situation is clear.
Mr. Bernanke, speaking earlier Thursday, cited estimates showing as many as 15% to 20% mortgage loans may be “under water,” meaning more is owed on the house than it is worth. The chairman estimated that mortgage lenders are on track to initiate 2.25 million foreclosure proceedings this year, more than double the rate before the crisis. Housing weakness has been a drag on the overall economy, Bernanke said, adding that “a slowing economy has in turn reduced the demand for houses, implying a further weakening in the mortgage and housing markets.”
