Treasury to Promote Homeownership? Not so fast

A version of this entry was posted on the DMI blog.

It's remarkable how the Bush Administration keeps missing the mark on the mortgage and foreclosure crisis.

It couldn't be more obvious that this country needs a response to the financial crisis that allows the housing bubble to deflate. So why is the Treasury Department actually conspiring to keep housing prices high and aggressively encouraging a new wave of homeownership?

The Wall Street Journal reported:

The Treasury Department is considering a plan to revitalize the U.S. home market that would push down interest rates for loans to purchase a home, according to people familiar with the matter.

The plan, which is in the development stage, would temporarily use the clout of mortgage giants Fannie Mae and Freddie Mac to encourage banks to lend at rates as low as 4.5%, more than a full point lower than prevailing rates for standard 30-year fixed-rate mortgages....

Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger loans, thus increasing demand and pushing up home values. The lower interest rates would be available only to borrowers who are buying a home, not those refinancing a mortgage.

This new shopping spree might help us feel better, but will it pay for our last drunken credit binge?

Alyssa Katz, the former editor of City Limits Magazine and the author of the upcoming book, Our Lot: How Real Estate Came to Own Us, commented that the plan "will do wonders for the share prices of homebuilders and prompt millions of homeowners to refinance, creating a swell of new business for mortgage brokers and bankers, but won't actually help those who are having real trouble paying their mortgages -- whose incomes and credit won't allow them to take advantage of the new rates. Low interest rates will keep home prices propped up at wildly inflated levels and encourage the continued reliance on excessive debt to sustain households and the economy."

The truth is homeownership as the path to the American dream has been oversold and recklessly exploited to fuel the American economy. Attempts to resurrect the so-called "ownership society" from the dead, will only come back to haunt us.

Comments

[Mark Winston Griffith - Huffpost Blogger]

Oh I understand the logic, but is this the best path to "stability"? There's a reason why they call this a "bubble".

Helping people in foreclosure through loan restructuring would deal with the mortgage crisis directly, at its source. It would make loans unaffordable that shouldn't have been that way in the first place. It would also help stabilize the housing market without creating another mortgage feeding frenzy, and without shifting wealth from one set of people to another.

[Peter007]

There is a crisis going on and the large fluctuations in prices are hurting everyone. A stable market is much better. Weather or not you agree with the governments objectives of home ownership, the deflation in prices has hurt many people that expected home values to remain stable. It has been the housing bubble deflating that has caused the credit crisis and resulting unemployment. Some people are predicting a depression.
Deflation in housing has already occurred and many people owe more than their house is worth. The injection of mortgage money in any sector of the housing market will have the effect of reversing the psychology that people have fearing further home depreciation. Once housing stabilizes, the fear of further losses in the banking and investment system will subside. Confidence may return and hiring will begin again. Those that cannot qualify for the new low rates will be able to have the option of selling their house in a stable market and retain some of their equity. Its better than losing all in a foreclosure. Also, low rates on AAA applicants open other mortgage opportunities for those with less than AAA credit. More money in any one segment of the market will help all segments.