So it seems the Treasury plan to subsidize new mortgages at 4.5 percent is every bit as dumb as I first thought. Commenter “Bri”, who have I have it on good authority knows something about the mortgage business, said:
If it goes thru [sic] as solely available to purchase loans, it would in effect be a builder bailout. Including refinance mortgages would help some who are having trouble making their payments, and others who might get cashout to use (spend) toward some other purchase (stimulate the economy). I have faith in this getting screwed up.
Indeed, and according to the New York Times:
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.
Right, so the plan doesn’t include provisions for mortgage refinancing, which at once is unfair to those who can afford their mortgages and more importantly, does nothing directly to address imminent, and perhaps not even medium-term foreclosures. So in effect, it’s a short term boon for prospective home buyers and home builders, which might make sense if the housing market were actually under valued. In fact, there’s no reason to believe this. What’s more, in the long term, it’s hard to see how this would do anything but delay the inevitable. If the government doesn’t continue to subsidize loans at 4.5 percent, presumably rates will return to market levels, driving down housing demand and thus lowering housing values yet again.
Perhaps there’s some short term imperative that would make this plan the correct policy choice, but it’s worth returning to the cause of the crisis: the worthlessness of collaterized mortgage debt vis-a-vis widespread foreclosure. The most straightforward way to address the problem is thus stemming the tide of foreclosures by directly intervening in troubled mortgages, not artificial invigoration of the housing market which may or may not address the root of the crisis at some point in the future.
Again, I invite any experts to comment.