February 6th, 2009

Fixing Mortgage Rates: It’s Baaaack



In early December, the Wall Street Journal published an article of supposed conversations between financial industry lobbyists who were have said to be encouraging Treasury officials to enact a program that would fix 30-year conforming rates at 4.5%. While nothing had resulted from those conversations back in December, Republican lawmakers have revitalized the idea earlier this week.

The criticisms we had with the idea of fixing mortgage interest rates back in December remain largely the same concerns we have today — if not enhanced to some degree.

From 12/04/08 (More Isn’t Always Better):

By setting a standard of 4.5%, the program could devalue existing mortgage investments that are held at prior rates. In short, this program has the potential to decimate private investors’ portfolios.

Why 4.5% — why not 3%, or 2%? Last week’s plans spurred a huge spike in mortgage activity; if there are potentially lower rates coming, potential purchasers will go back to the sidelines — much like the anticipation for falling home prices has kept homebuyers on the sidelines waiting for even better deals.

If this initiative under the Treasury, which may potentially utilize the second $350 billion from the $700 billion rescue plan, is enacted, the government will completely take over a once-efficient marketplace.

We’ve addressed the negative impact that government interaction has had on the decision making of financial institutions. But what impact will further government interaction have on the housing market? HSH Vice President Keith Gumbinger asks, “What kind of permanent damage might be caused by such a program?”

An opinion piece from today’s Wall Street Journal answers some of those questions, as well as spells out other concerns we failed to mention two months ago:

The problems are price-fixing, taxpayer cost, and a misunderstanding of housing trends. True, the government would not set the prices of the houses themselves. But by fixing the price of home financing, the government would be nationalizing one more branch of the housing market. The feds tried this recently with student loans, and the result is that the private market largely collapsed.

These days even Barney Frank agrees that homeownership rates were artificially high at the end of the boom. Getting back to those levels would only presage another bust. That bust would be scheduled for shortly after this supposedly temporary program ended, assuming it ever does.

Any such program would also have to be huge — and hugely expensive.

Senate Republican leader Mitch McConnell, who is heading the initiative, is urging that his plan be included in the president’s American Recovery and Reinvestment Act.

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About the HSH Blog's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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