Treasury's New Plan - 4.5% Mortgage Rates

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Homeowners may soon enjoy mortgage rates as low as 4.5 percent if the Treasury Department has its way.

According to The Wall Street Journal's on-line addition late Wednesday, the department is discussing a plan that would use Freddie Mac and Fannie Mae to push banks to make mortgages available at more than a full percentage point below the current levels for a 30 year fixed rate mortgage.

The plan under review might lower rates to the 4.5 percent range and would be in addition to a program announced last week wherein the Federal Reserve will purchase up to $600 billion of debt either issued or backed by Freddie Mac, Fannie Mae, Ginnie Mae, and the Federal Home Loan Banks.  That program is already having an effect on mortgage rates which have dropped and caused investors to pay more attention to the stocks of banks and home builders.

Probably in response to the earlier new program and the lower rates, mortgage applications jumped a record 112.1 percent as seasonally adjusted over the previous week according to the Mortgage Bankers Association.

The Journal reported that the government would encourage banks to issue new mortgage loans at lower rates by offering to purchase securities backed by the loans at a price equivalent to the 4.5 percent rate; funding the program by issuing Treasury debt at 3 percent.

Under the Treasury Department proposal, the low rate would only be available to those purchasing a home, not for refinancing.  Borrowers would have to qualify for a conforming mortgage that could be guaranteed by one of the government sponsored enterprises or the Federal Housing Administration.   To qualify for those types of loans borrowers must be able to document their income and have sufficient income to make monthly payments.

The government hopes that this plan will increase the demand for homes and stabilize housing prices.  Both of these factors are considered by many economists to be key to improving the current economic situation.  It may also help a bit with the other primary housing concern - preventing foreclosures - as it may make it easier for homeowners in trouble to sell their homes and get out from under delinquent mortgages.  In many cases, however, such an avenue will not be available to homeowners because so many lack any equity.

The Treasury Department plan is only in the talking stage and may not be ready until after President Bush leaves office on January 20 at which point it would be necessary for President-elect Obama to sign off on it.