Mortgage Rate News

This morning, the Federal Reserve announced a plan specifically designed to send mortgage loan interest rates lower. Right now, mortgage rates are higher than they should be, and that is discouraging some buyers. The new program initiated by the Fed will include directly buying housing-related and mortgage-related obligations from Freddie Mac and Fannie Mae, as well as mortgage backed securities. Included in this mortgage-backed securities purchase is Ginnie Mae. Behind the Mortgage reports on the point of the Fed’s action:

This action is aimed directly at, and intended to narrow, the interest rate “spreads” between Mortgage related securities and treasury securities, which have been leaking wider ever since the Fed stopped short of affirming a “full faith and credit guarantee” for Fannie and Freddie’s obligations.

It is clear that all of the efforts being made by the government so far to increase liquidity have not been working. And, even though a lot of play as been given to the $700 billion bailout, another zero needs to be added in order to get the scope of what has actually been promised in terms of bailouts and rescues: $7 trillion.

New phase in Fed liquidity plan: target consumer loans

Today’s announcement of a plan for easing mortgage loan interest rates was not the only new loan program offered by the Fed. TARP will also soon be including consumer loans in its 4th incarnation. In order to encourage investment in consumer debt-backed securities, loans are being offered to those who invest in such things as credit card debt, car loans and student loans.

The idea behind this particular plan is to encourage lenders to loosen their tightened credit requirements so that borrowers can get more credit. The hope is that lenders will give more loans, and that consumers will then go on a debt-fueled spending spree to help the economy. The Big Hope is that this will come in time for consumers to get the credit lines they need to “save” the holiday shopping season.

With all the largess flowing from Washington, it’s starting to become difficult in terms of figuring out where money is going (no one’s worried about where it’s coming from, at any rate). And I know everyone’s all about the Citi bailout this morning, but another stimulus may be on the way. This one may have more of a direct impact on “ordinary” folks — or at least first time homebuyers. The new stimulus is one suggested by the National Association of Homebuilders (NAHB).

Trying to fix the housing market first

As one might guess, the National Association of Hombuilders is fairly certain that the government is throwing money at all the wrong thigns right now. Instead of fixing the housing market and trying to get things back on track with homeowners and home prices, the government continues to chuck money, through bailouts, at a number of companies that made downright poor business decisions. Instead, suggests the NAHB, the government should aim at creating measures to help get the housing market moving, mainly by:

1. Offering a tax credit that is larger than the $7,500 offered right now to first time homebuyers. Also, NAHB doesn’t think that the credit should be paid back.
2. Subsidy for mortgage interest rates that would, according to Mortgage News Daily, “target interest rates on 30-year fixed-rate government-backed mortgages for conforming loans that would bring rates down from the current 6.0 percent range to around 3 percent for those made in the first half of next year and 4 percent for those originated during the third and fourth quarters of 2009.”

It’s an interesting thought — focusing on people who might be interested in buying. However, it does not address some of the problems facing the economy right now. Like, you know, foreclosure. Instead, the NAHB plan runs the risk of putting more unoccupied homes out there, without doing anything to forestall foreclosure. The other issue is that first time homebuyers can’t take advantage of any of this as long as they can’t get approved for mortgage loans.

There are a number of plans being proposed right now with regard to how to fix the mortgage mess by preventing foreclosures. Unfortunately, a lot of the ideas circulating out there are variations on a familiar theme: Throw money at a problem and hope it goes away.

Someone else is coming out with a new idea, though. At Middlebury College, an economist named David Colander is suggesting that everyone be issued foreclosure vouchers — even those who are not in danger of foreclosure. RealEstateProArticles.com has the details of the foreclosure voucher plan:

The key element in Colander’s plan is the use of foreclosure vouchers. The government would allot foreclosure vouchers to taxpayers according to income levels, with the lowest earners receiving the biggest voucher amounts and with people in certain high income levels excluded from the scheme.

The vouchers are foreclosure vouchers and therefore can only be used in two ways: to buy foreclosed properties or to pay mortgage loans to save homes from foreclosure.

For recipients who cannot use the vouchers because they are not facing foreclosures or are not interested in buying foreclosure properties, they can sell their vouchers on the secondary market at a discount. The discounted vouchers would attract investors to the foreclosed housing market, creating housing demand, restoring home prices and ultimately contributing to the nation’s economic recovery.

I admit that I find this suggestion intriguing. It could, in theory, lead to additional real estate investing in foreclosed properties, and stop some foreclosures from happening altogether. And the foreclosure vouchers would help reduce the amount that buyers would need to borrow, making it easier to get financing for the remainder of the purchase amount of foreclosed properties.

It certainly seems like a win-win for everyone involved. Of course, these plans have various Unintended Consequences that can throw the whole thing off track. But I do like that it’s something different. After all, it is supposed stimulate investment, and it offers potential rewards to those who have been making prudent financial choices.