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Treasury Department to Intervene in Mortgage Industry?

Thursday, December 04, 2008
by Pace Realty Group
This article is courtesy of 
David Cho, Zachary A. Goldfarb and Dina ElBoghdady
Washington Post Staff Writers

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.

Treasury officials told the Realtors that the plan could be a more effective way to help homeowners than focusing efforts solely on borrowers who are struggling to meet their monthly payments, the sources said. Democratic lawmakers have been advocating a proposal to modify the mortgages of distressed homeowners.

A source said Treasury officials suggested at the meeting that the Realtors start a grass-roots campaign to press the mortgage rate plan with lawmakers.

Treasury officials described the situation as fluid and said the plan was still being finalized, according to people in contact with the department. The officials expressed concerns yesterday that premature disclosure of the plan could prompt Americans to put off buying homes and hold out for a better rate, sources added.

For the full article

www.washingtonpost.com/wp-dyn/content/article/2008/12/03/AR2008120302889.html

The Feds Role in Mortgage Rates

Tuesday, March 11, 2008
by Pace Realty Group

Blog by John Lynch of PRG Funding

If I had a dollar for every person that said to me, “the Federal Reserve cut mortgage rates why are they higher than last month.”  Contrary to popular myth, the Federal Reserve doesn't control mortgage rates.  In fact, their most well-known strategic tool -- the Federal Funds rate -- is the overnight interest rate which banks charge each other when a bank needs to borrow money to meet end- of-day reserve requirements.  Those are the rules that say that a bank must have so much cash on hand when the books close at the end of the day, and those funds can be borrowed from another bank at this interest rate.  You should know that the Fed merely "suggests" what that rate should be, which is why it's called a "target" rate; the actual rate is negotiated between the borrower bank and the lender bank.

A good way to keep a handle on the Fed is to remember that the Fed Funds rate is the shortest of short-term rates – almost like an overnight loan -- and a fixed-rate mortgage is all the way at the other end of the scale, a loan that lasts as long as 30 years.

The end result is that the Fed raises or lowers interest rates to help address increases or decreases in economic activity. Lower rates can help banks to make certain kinds of loans more cheaply, especially for business and certain kinds of consumer lending, and that can help to generate greater economic growth. Higher rates can cool demand, helping to keep inflationary pressures from forming.  Expectations of what the Fed may do can be more important than what they actually do, as their actions or inactions can help to confirm or deny what investors believe.  This is why the market reacts sometimes strong to the Fed chiefs comments.

You also may have realized that sometimes the Fed cuts interest rates -- and fixed mortgage rates actually rise as a result. Why?  If the Fed is taking steps to address economic weakness by lowering rates, that likely means that a return to faster growth and the possibility of higher inflation.  Currently we are seeing the weaken dollar and the prices of commodities increasing.  What is the Feds next move?  I think you may have an idea.

Information Courtesy of Sigma Research