We have all heard hype about the proposal for 4.5% mortgages backed by the government. It has been publicly confirmed by Neel T. Kashkari, the assistant Treasury Secretary who is overseeing the $700 billion bailout plan, that the mortgage plan was under consideration. 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 current flaws in the plan:

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these mortgages would only be offered to home buyers originating loans on new or existing homes. It doesn’t apply to the 50 million current homeowners who would likely be interested in refinancing at 4.5%.

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offers no relief to the millions of homeowners facing foreclosure

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banks are not supportive of this plan, as it would put the government in control of the rates they charge and virtually eliminate any downstream refinancing business as most homeowners would sit on the 4.5% 30 year rate indefinitely.

The current Pros of the plan:

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could result in the sale of an estimated 500,000 homes thus stimulating both the housing market and overall economy.

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strongly supported by the real estate industry as a means to increase sales

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would take inventory off the market which could result in a stabilization of housing prices

It has been 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. If the program were extended to people who simply wanted to refinance, the government’s cost could easily be 10 times higher.

It is difficult to predict how this will play out. There are serious showstoppers on both options of “new loans only” and “including refinances.” My guess is that like the previous well intended government stimulus programs, it will be ground through the political sausage machine and morph into something with some value but will encounter implementation problems. One further downstream “unintended consequence” is that once the program has run its course, unless the loans become assumable, the housing market would likely enter another slowdown as most homeowners wouldn’t give up their 4.5% 30 year fixed loans for higher rates. We will update the status on VR SAM’s Military Community Forum, so stay tuned.

Susan Wallace - susan@susan-w.com