Treasury Considers Plan to Halt Home Price Slide
Marshall here. Slowly but surely, the Treasury is beginning to move more aggressively on providing help to homeowners, as opposed to bankers. This makes sense: A financial meltdown and housing deflation cannot be cured simply by pumping money into the banking system. You also have to consider a program which provides mortgage relief to homeowners as well.
The Treasury Department is belatedly moving in this direction, by considering a plan to halt the slide in home prices that would lower mortgage rates using Fannie Mae and Freddie Mac. The plan could reduce rates for newly issued loans to as low as 4.5%, according to the Treasury release. Well, it’s a start. But looking at this in a bit more detail, I have a problem with it. It is “trickle down” and not direct enough.
The Treasury is looking for the incremental buyer, in this case the U.S. government, to push the rate down by their buying. But this isn’t the same as renegotiating the rates of existing loans, which I believe is what the FDIC wants to do and what I advocated earlier.
And, the Treasury doesn’t know that just because they start buying that the spreads won’t increase or some other factor comes into focus and the rates don’t go down by the desired amount.
If this was the case, well they could buy their own treasurys and force rates to zero (Bernanke threatened to start this yesterday).
While this may be a good first step, it isn’t comprehensive enough and isn’t direct enough.
On another very important note, I made a serious miscalculation in the savings on the at least $2 trillion of variable rate loans that I think (don’t know for sure and it may be much more) are out there. This doesn’t diminish from my proposal but the savings would be “only” say, 3-4% of $2 trillion or $80 billion rather than the hundreds of billions that I had first calculated. Sorry for the bad figures.
But the concept is still the same. And, it is at no out of pocket cost to the government, in fact as I indicated if Fannie and Freddie make the loans they could make 200-300 bp of positive carry which could be a very large number if it continued for more than a few years.