The Treasury Department is reportedly considering a plan to bolster the housing market with low-interest government-backed mortgages for home buyers.
The approach, first reported by the Wall Street Journal yesterday afternoon, would allow banks to offer fixed-rate 30-year home loans at interest rates as low as 4.5 percent to home buyers who qualify for government-backed financing. This would include home loans made through the Federal Housing Administration (FHA) or conforming mortgages eligible for purchase or guarantee by mortgage finance firms Fannie Mae or Freddie Mac. “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,” according to the Journal’s story.
In a move that could be significant for builders, the plan would apply only to home purchases, not refinancing an existing mortgage. That means would-be home shoppers would now have two big reasons to finally buy a house: low interest rates and bargain prices.
Of course, those low, low prices also remind consumers of how much home prices have fallen in recent months, which also has made them reluctant to buy.
“In our view, confidence of potential home buyers that prices are unlikely to deteriorate further is the primary factor today as traditional affordability metrics are back to acceptable levels,” analyst Ivy Zelman said today in a report discussing the Treasury plan. “Unless the government can end the downward foreclosure spiral, we believe that consumers will be unwilling to purchase a home when there exists a high probability that their down payment could be eliminated in a short amount of time by further home price deflation.”
She added: “With that said, lower funding costs have to be considered an incremental positive and could further fuel foreclosure purchases that have been helping to clear excess inventory from the market.”
Reducing the number of both foreclosed and new inventory homes is critical to the health of the housing market, which is considered by many to be both the source of and a partial solution to the country’s current economic ills. As such, the Treasury continues to explore ways to stabilize the financial markets and residential real estate, as Neel Kashkari, interim assistant secretary for financial stability, said today in testimony before a Senate appropriations subcommittee.
“On December 1, Secretary Paulson underscored the critical priorities for the most effective deployment of remaining TARP funds, foremost of which is to ensure our banking sector has the necessary capital base to continue lending to consumers and businesses and support economic growth, and to help homeowners avoid preventable foreclosures,” Kashkari said. “… [W]e continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications, which are a necessary part of working through the necessary housing correction and maintaining the strength of our communities.”
Alison Rice is senior editor, online, at BUILDER magazine.