Are 4% mortgages the answer?

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Cheap mortgages are back. Rather, the idea of the government standing behind cheap mortgages in order to get people to buy houses and prop up home prices is back. Senate Minority Leader Mitch McConnell starting trumpeting the notion in full force today. The argument: that a 4% fixed-rate loan for “any credit-worthy borrower”—whether homebuyer or homeowner looking to refinance—will spur enough demand for new homes and affordability of current ones to steady property prices. That, in turn, should help with the value of those troublesome mortgage-related securities.

This, you might recall, was an idea put forth in October by former Council of Economic Advisers head Glenn Hubbard and Columbia University colleague Christopher Mayer (whose approach to loan modifications you know I like). Back then, though, the magic rate was 5.25%. For a while, it looked like Treasury was going to bite, but then the idea kind of petered out as the government stayed busy doing other things to drive down mortgage rates—like the Federal Reserve’s campaign to buy mortgage-backed securities. Just today said that the average 30-year fixed-rate mortgage was at 5.34%. Six months ago, the average was 6.31%. These days, according to Bankrate, you can come by 30-year fixed-rates for as little as 4.38%.

I am tempted to ask if 38 basis points will make all the difference, but, of course, the issue is not just what a mortgage costs, but who can get it. The Fed’s senior loan officer survey also came out today: 47.1% of U.S. lenders surveyed said that they’ve tightened their lending standards on prime mortgages over the past three months. At the same time, 31.4% saw stronger demand for prime mortgages, compared with 5.8% in October. That seems to indicate there are people out there who want a loan but can’t get it.

I am not, though, sure how Congress is going to determine a “credit-worthy borrower” if not by a bank’s willingness to lend to him. Fannie and Freddie are supposed to buy the new loans—I’m pretty certain that at this point we can all agree we don’t want to use the federal housing agencies to encourage banks to make unwise loans. Which gets back to the point from earlier today and the question of whether we should be making banks lend.

There’s also the question, raised by my colleague Steve Gandel in December, about how much cheap, government-backed mortgages will ultimately wind up costing taxpayers. Steve concluded that it might be a lot more than it would seem at first pass. Maybe it’s time to give that article another read.

UPDATE: While I may have shied away from having too much of an opinion on this, Harvard’s Edward Glaeser, writing in the New Republic, did not:  

The popularity of subsidizing borrowing has led some to advocate a new round of federally subsidized lending, perhaps at an interest rate of 4.5 percent, aimed at pushing housing prices back up. But nothing is going to bring back the boom days of 2006. On average, housing prices go up between 3 percent and 5 percent when interest rates fall by 1 percent. A big loan program that pushes lending rates down to 4.5 percent would probably lead to a price boom of less than five percent. Such a modest impact would be barely noticeable in markets that have lost more than one-fifth of their value in the last year. It certainly would do little stem the tide of foreclosures. Housing in America is a $20 trillion market. It is no more plausible that the government will be able to bring housing prices back to bubble-like prices than it was for Herbert Hoover, or Franklin Roosevelt, to bring stock prices back to their 1929 levels.

The whole article is pretty great—I highly recommend it.