4.5% Mortgage Rates?

By now everyone has heard that the Treasury Department is considering plans to push mortgage rates to 4.5% in an effort to stimulate the housing market. While this sounds like a good idea, there are some real problems with it.

The biggest problem is that the government doesn't control mortgage rates. Mortgage rates are set by the market based on what investors will buy and sell mortgage backed securities for. It's kind of like the government saying they plan to move the Dow Jones back over 10,000. Maybe they could do it by buying enough stock, or in the case of interest rates buying enough mortgage backed securities, to move the overall market. Maybe that would work, but maybe it wouldn't. It's not like the Fed Funds rate that can be arbitrarily set.

Beyond that you have to wonder how much it would even help. Mortgage rates are already hovering around 5%. Would an extra 1/2% (about $60 a month on a $200,000 loan) really be enough to bring out the buyers? If you can't afford a $1,200 PITI payment, would $1,140 make a difference?

This plan was floated as a way to help struggling homeowners, but apparently the 4.5% is only for new purchases. People who need to refinance to be able to stay in their homes won't benefit, unless of course some new buyer comes along to save the day.

Of course, as a mortgage broker I am all in favor of lower rates. I just don't think lower rates will fix the housing market. Rates have actually been pretty good through this whole crisis. I'm sure a 4.5% rate wouldn't hurt, but I don't think it's worth the cost in taxpayer dollars.

Borrowing and spending money the government doesn't have is not only expensive, it leads to inflation down the road, which is a real long term threat to interest rates. I also have some concerns about what happens when the crisis is over and the Treasury Department decides to dump all these securities. It seems like there's the potential to do a lot of long term damage for a potentially insignificant short term gain.