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View Full Version : Washington’s New Tack: Helping Homeowners


Renegade
12-05-2008, 06:33 AM
By EDMUND L. ANDREWS
Published: December 4, 2008

WASHINGTON — After pouring vast amounts of money into financial institutions of almost every type, and having little to show for it, the Bush administration and the Federal Reserve are suddenly taking a new look at ordinary homeowners.

Ben S. Bernanke, chairman of the Federal Reserve, warned on Thursday that the soaring number of foreclosures threatened the economy. He then proposed some ideas — government-engineered loan modifications, and more taxpayer money to help people refinance — to keep people in their homes.

“The public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble,” Mr. Bernanke said. “More needs to be done.”

At the Treasury Department, meanwhile, top officials continued to work on a plan to bolster the housing market by subsidizing 30-year home mortgages with rates as low as 4.5 percent — a level that home buyers have not seen since the early 1960s.

Both actions highlighted how economic policy makers have come almost full circle. Since the financial crisis began last summer, both the Fed and the Treasury had focused almost exclusively on patching up the financial system — propping up banks, Wall Street firms, money market funds and issuers of commercial debt.

But the new focus on helping individuals could create a bitter split between those who want to buy homes and those who already own them. It has already opened up a rift between the real estate industry, which wants to increase sales, and the banking industry, which wants to get out from under staggering volumes of troubled mortgages.

Under a plan that top Treasury officials are weighing, the Treasury Department would underwrite tens of billions of dollars worth of 30-year, fixed-rate mortgages at rates far lower than most Americans have ever seen.

According to Bankrate.com, the 30-year, fixed-rate mortgages fell on Thursday to 5.58 percent, down from 5.76 percent last week. The 10-year Treasury note fell to 2.55 percent late Thursday, a new low.

But the cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate.

As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford. Nor would the plan offer any benefit to people who have stayed current on their mortgages and would simply be interested in taking advantage of a lower rate. As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower.

“At this point, our view is that such a program may do more harm than good,” said Camden R. Fine, president of the Independent Community Bankers of America, which represents about 8,000 small banks.

“You have thousands of banks that made loans and have them sitting on their books, and whose borrowers have worked their rear ends off to make the payments,” he said. “Those people are going to go to their banks and tell them their neighbor just got a 4.5 percent loan, and the banks aren’t going to be able to help them. They’re going to have extremely angry and disgruntled customers.”

But the National Association of Realtors, whose members want to bolster home sales, is lobbying hard for the idea.

“We believe that the only way to really address the housing situation is to increase sales,” said Lawrence Yun, chief economist for the association. “Home prices will not stabilize until we address the inventory problem, and the only way to bring down the inventory of houses on the market is to bring in a new set of buyers. We think this would do the trick.”

Mr. Yun estimated that a one-year program to provide home buyers with an interest rate of 4.5 percent would cost the government about $50 billion. It would result, he predicted, in about 500,000 home sales — an increase of slightly more than 10 percent over today’s depressed sales rate. If the program were extended to people who simply wanted to refinance, Mr. Yun warned, the government’s cost could easily be 10 times higher.

Neel T. Kashkari, the assistant Treasury secretary who is overseeing the $700 billion bailout plan, publicly confirmed on Thursday that the mortgage plan was under consideration but offered no other details.

People familiar with the discussions said Treasury officials were still debating the exact mechanism for financing the cheap mortgages. The main idea is to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance companies, to buy up and guarantee 30-year, fixed-rate mortgages paying 4.5 percent interest.

The Treasury would provide the money by buying up the mortgage-backed securities from Fannie and Freddie.

The plan closely resembles a proposal developed by Christopher J. Mayer, vice dean at the Columbia Business School.

“This really is the opportunity of a lifetime,” he said. “If you ask someone if this is the time to come into the market, I think anyone who would have bought a house in 2007 and was sitting on the sidelines, or who wants to buy this year or would buy in 2010, would want to take advantage of this.”

Mr. Mayer said long-term Treasury rates are so low right now that the government could actually make a profit on the cheap loans. The Treasury can sell 10-year bonds right now and pay only 2.7 percent a year, far below the 4.5 percent that it would be charging home buyers.

But he said his own preference was to make the mortgages available to existing homeowners as well as home buyers.

“I think there are additional benefits one could have by extending the program for people who refinance,” Mr. Mayer said. “At 4.5 percent, you might be looking at 25 million people who could refinance and the average savings could be $400 to $500 a month.”

In the past, Treasury and Fed officials often pleaded that their rescues of Wall Street were crucial to the well-being of Main Street. But the new Treasury idea would amount to directly helping Main Street.

Meanwhile, Mr. Bernanke all but reversed the rhetoric of recent months by arguing that helping homeowners avoid foreclosure were critical for the whole economy.

“Steps that stabilize the housing market will help stabilize the economy as well,” Mr. Bernanke said. “Reducing the number of preventable foreclosures would not only help families stay in their homes, it would confer much wider benefits.”

Mr. Bernanke, speaking at a Fed conference on housing, outlined proposals for bolder government action. He suggested that the Treasury subsidize lower fees and interest rates on a new program, Hope for Homeowners, that is intended to help troubled homeowners refinance at much lower rates. At the moment, lenders pay an upfront insurance premium of 3 percent of the loan value and borrowers face fairly high interest rate of 8 percent.

Mr. Bernanke also supported a proposal by the Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, to have the government engineer as many as 1.5 million loan modifications. The Treasury and White House have fought the idea for months.

Finally, Mr. Bernanke proposed that the government share the cost when a mortgage servicer reduces a borrower’s monthly payment. Preventing foreclosures, he said, “should be high on the agenda.”

http://www.nytimes.com/2008/12/05/business/05housing.html?em

neilyoungfan
12-05-2008, 09:54 PM
By EDMUND L. ANDREWS
Published: December 4, 2008


Mr. Mayer said long-term Treasury rates are so low right now that the government could actually make a profit on the cheap loans. The Treasury can sell 10-year bonds right now and pay only 2.7 percent a year, far below the 4.5 percent that it would be charging home buyers.

But he said his own preference was to make the mortgages available to existing homeowners as well as home buyers.

“I think there are additional benefits one could have by extending the program for people who refinance,” Mr. Mayer said. “At 4.5 percent, you might be looking at 25 million people who could refinance and the average savings could be $400 to $500 a month.”



I think Mr. Mayer is on the right track with offering these loans to everyone, particularly since the Treasury can actually make money on them. I think they should go a step further and offer a program for buyers of foreclosed real estate at an even lower rate, say 3.5%. One stipulation would be that you have to actually live in the home. No "investors" allowed into the program. And banks and local authorities should get together and set up a foreclosure website to list all these properties so people could easily find them. And no, not one of those websites where you have to pay to look at the listings.