Obama Team Interest Encourages Treasury Mortgage Plan
By Robert Schmidt and Craig Torres
Dec. 12 (Bloomberg) -- President-elect Barack Obama’s economic team is expressing interest in a U.S. Treasury plan to spur homebuying through new securities aimed at driving down mortgage rates.
Incoming White House economic chief Lawrence Summers is seeking details of the proposal from Columbia Business School Dean Glenn Hubbard, who put together the plan’s foundation with Columbia’s Christopher Mayer. Mayer has briefed Federal Reserve Bank of New York staff. Timothy Geithner, head of the New York Fed, is Obama’s Treasury-secretary designate.
Obama’s encouragement is important for the program to proceed because the Treasury doesn’t want to start projects that could be abandoned after January, a Bush administration official said. The proposal, now on a fast track at the Treasury, would be the most comprehensive government effort yet to stimulate the housing market. It would accelerate the decline in mortgage rates already sparked by a Fed commitment to buy $600 billion of debt linked to home loans.
“This proposal is all about putting out the fire,” said Mayer, real-estate professor at Columbia in New York who is a visiting scholar at the New York Fed. “There is nothing else on the table that even has the possibility of preventing a large, further decline in house prices.”
The program Treasury Secretary Henry Paulson and his aides are considering would use Fannie Mae and Freddie Mac, the federally chartered mortgage financers seized by the government in September, to reduce 30-year fixed home-loan rates to around 4.5 percent, from an average of about 5.54 percent currently.
Fannie and Freddie, already the biggest sources of funding for U.S. housing, would buy mortgages at the lower rate from lenders. The government would then purchase securities issued by Fannie and Freddie that were backed by the loans.
Transition spokeswoman Stephanie Cutter said “we’re looking at a range of options targeted at foreclosure relief in the housing area.” Obama takes office Jan. 20.
While Paulson’s team is only exploring an initiative for new purchases, the incoming administration wants to go beyond that and address the record surge of foreclosures. Some industry lobbyists have urged the inclusion of refinancing for existing homeowners, up to one-fifth of whose loans are bigger than the value of their properties, estimates show.
“We’ve got to start helping homeowners in a serious way, prevent foreclosures,” Obama said in a Dec. 3 press conference in Chicago. “The deteriorating assets in the financial markets are rooted in the deterioration of people being able to pay their mortgages and stay in their homes.”
BlackRock Inc. Chief Executive Officer Laurence Fink said yesterday he’s proposing to Obama that the Treasury buy new mortgages issued by Fannie and Freddie, with rates ranging from 4 percent to 4.5 percent. New York-based Blackrock was among the companies seeking to manage assets under a previous Paulson plan to purchase toxic debt, mainly linked to mortgages, under the $700 billion financial-bailout fund.
The Treasury’s new plan would be outside that fund, known as the Troubled Asset Relief Program. The department has authority to buy mortgage-backed securities, and the Fed last month pledged to purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies.
Some analysts said that expanding the Paulson proposal to include refinancing existing mortgages would be too great a cost for the aid it would offer the housing market.
“It’s a much more efficient use of the government’s balance sheet to do this as a purchase program” only, said Nicholas Strand, a mortgage analyst at Barclays Capital Inc. in New York. He estimated the cost of a plan to buy 4.5 percent loans for new purchases at about $300 to $400 billion. Adding the refinance option could cost up to $3 trillion, he said.
Community activists argue that the government must step up aid for Americans at risk of losing their homes to halt the cycle of defaults and depreciating property values.
House prices nationwide began falling in the third quarter of 2006, and have continued dropping since, according to figures from S&P/Case-Shiller. Through September 2008, values were down 21 percent from the peak. One in 10 U.S. home loans was past-due on payment or in foreclosure in the third quarter, Mortgage Bankers Association figures show.
Those numbers could worsen as joblessness climbs. The unemployment rate may reach 8.2 percent next year, from 6.7 percent in November, a monthly Bloomberg News survey of economists shows.
“The problem I’m having is, so what,” said John Taylor, president of the National Community Reinvestment Coalition in Washington. “In other words, what does this have to do with the foreclosure crisis?”
Mayer, who used to work at the Boston Fed, countered that “there is no evidence whatsoever that reducing foreclosures will help house prices.” Mayer and Hubbard say that if the government was able to lower mortgage rates by 1 percentage point it would raise housing demand by about 10 to 17 percent, “blunting” projected declines in property values.
Other government proposals have aimed at adjusting current mortgages to head off foreclosures. Federal Deposit Insurance Corp. Chairman Sheila Bair has pushed to use TARP funds for such a modification plan.
“Policy makers are coming around to the idea that these modification proposals aren’t going to have much of an effect on home prices,” said Andrew Laperriere, managing director at International Strategy & Investment Group in Washington. “So then, you look at the demand side.”
To contact the reporters on this story: Robert Schmidt in Washington at firstname.lastname@example.org; Craig Torres in Washington at email@example.com