Below The Beltway

The latest plan from the Treasury Department involves manipulating interest rates so that people will buy houses again:

The Treasury Department is strongly considering a plan to intervene directly in the mortgage industry to dramatically force down rates and stimulate the moribund housing market, according to sources familiar with the proposal.

Under the initiative, the Treasury would offer to buy securities that finance newly issued loans for home purchases, according to the sources. But to participate in the government’s program, mortgage lenders would have to set exceptionally low interest rates, for instance, no more than 4.5 percent for traditional, 30-year fixed-rate loans.

These securities would be purchased primarily from Fannie Mae and Freddie Mac, the financing giants that buy most mortgages from U.S. lenders, according to sources who spoke on condition of anonymity because the plan has not been finalized.

The cost of the plan and source of funding remain unclear. One possibility is for the Treasury to raise money by issuing bonds to the public at 3 percent interest. This could allow the government to turn a profit because it would be buying securities that pay 4.5 percent.

At a meeting attended by the Treasury’s Interim Assistant Secretary for Financial Stability Neel Kashkari and the National Association of Realtors in mid-November, senior Treasury officials said they were optimistic that subsidizing lower mortgage rates with taxpayer dollars would help revive the housing market, sources said.

Because, you know, trying the same thing we did five years ago seems like such a great idea, right ?

Moreover, as noted at Calculated Risk, it’s unlikely that the Treasury Department’s plan would have the impact on the housing market that it’s proponent’s claim it would:

However, housing is an imperfect market - house prices are sticky downwards and typically take several years to adjust (what we are seeing!) - so even though there is currently far too much supply, prices still have not fallen far enough to balance supply and demand.

An increase in demand from current renters deciding to buy, would probably only make a small dent in the huge excess supply. And house prices would continue to fall - so the goal of supporting house prices would not be met.

In fact, it could be worse. Landlords, already struggling with high vacancy rates and falling rents, would probably lower their rents further and make the rent vs. buy decision more difficult again. So lower interest rates might not boost demand very much, it might just lead to lower rents.

This is a bad idea from the Treasury. And leaking this story is a terrible idea, since some potential homebuyers might potentially wait for lower interest rates.

And, as for the proposal’s limitation to new home purchases, don’t expect that limit to last for long:

It’s safe to predict that if the Treasury limits the program to only those who are buying homes, it will ignite another political firestorm.

Millions of American homeowners would likely demand that the program apply to refinancings as well, as they see new neighbors move into the home next door with a super low, federally subsidized interest rate.

The public outrage could be very similar to that over the $700 billion bailout for the financial industry.

And, if that happens, we’ll have people refinancing to get the lower rates, taking out whatever equity there might be left before it’s too late, and sending us down the same road that got us to where we are today.