Treasury weighs plan to lower mortgage rates

Financial industry lobbyists are urging the Treasury Department to take steps to lower mortgage rates in hopes of stabilizing the housing market.

Under the proposal, the Treasury Department would seek to lower the rate on a 30-year mortgage to 4.5%, Scott Talbott, a vice president at the Financial Services Roundtable, said Wednesday. That’s about 1 percentage point below the current rate of 5.6%.

The Treasury Department would do so by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac, Talbott and other industry sources said.

Although the details of the proposal are in flux, the program could be similar to the effort the Federal Reserve announced last week to purchase up to $500 billion of mortgage-backed securities from the two mortgage giants, Talbott said.

Mortgage rates dropped steeply in the wake of the Fed’s announcement. Additional purchases could drive mortgage rates down further and enable Fannie Mae and Freddie Mac to purchase or back more home loans.

Fannie and Freddie, which were seized by federal regulators in September, own or guarantee about half of the $11.5 trillion in U.S. outstanding home loan debt.

The Treasury Department is strongly considering the proposal and could announce a decision as early as Monday, industry sources said. Agency spokeswoman Brookly McLaughlin said she would not comment on speculation about actions the department may take in the future.

The Treasury Department could make the proposal as part of a request for the second $350 billion of the $700-billion financial rescue fund, industry sources said.

Treasury Secretary Henry M. Paulson has been criticized by members of Congress for using the bailout money to shore up Wall Street banks while doing nothing for homeowners facing foreclosure.

The proposal was reported Wednesday on the Wall Street Journal’s website.

In recent weeks, a diverse set of industry groups have called on lawmakers and the incoming administration of President-elect Barack Obama to subsidize lower mortgage rates and beef up tax credits to stimulate housing demand.

The National Assn. of Realtors has been pushing a plan under which the federal government would spend $50 billion to lower mortgage rates. It says doing so would yield about 500,000 more home sales.

The National Assn. of Home Builders is leading a new Fix Housing First coalition to push for aid to the ailing sector, including a tax credit of up to $22,000 for anyone who buys a home before the end of 2009.

“The goal is drive mortgage rates so low that home prices not only stop falling but begin to rebound,” said Greg McBride, senior financial analyst at Bankrate.com.

Though the plan, if enacted, would help anybody looking to buy or sell a home or refinance out of an expensive mortgage, it may not help those whose credit is so damaged that banks don’t want to lend to them.

“It may change the number of borrowers seeking loans, but it won’t change the qualifications for who gets those loans,” McBride said.