Is it time for the government to set mortgage rates?
August 24, 2011
With mortgage rates at 50-year lows perhaps the way to fix the housing sector is to refinance all mortgages--to have, in effect, the government "normalize" the mortgage marketplace.
That's essentially the proposal of two Columbia University professors, Christopher Mayer and R. Glenn Hubbard.
"Under this plan," they write, "the government would take action to return mortgage rates to what they would otherwise be if the mortgage market were functioning normally (about 160 basis points above the 10-year Treasury rate). In addition, policy makers would help address refinancing problems for owners with negative equity by engaging in sharing equity write-offs with lenders.
"The government and taxpayers have an enormously strong incentive to address the housing market given that the losses to banks will not end and the economy is unlikely to stop declining until the housing market stabilizes. After all, the government currently owns or guarantees nearly $6 trillion in mortgage assets."
There's something to this idea, at least in part.
Federal Rate Setting
To begin with, there's precedent for the government setting mortgage rates. For instance, HUD used to set the mortgage rates for FHA loans, a practice which ended under the Housing and Rural Recovery Act of 1983. Lenders who made loans insured under the FHA program before 1983 could charge no more than a given interest rate. Of course, they were free to charge higher rates for non-FHA loans.
The VA still has the right to set mortgage rates under Public Law 102-547, The Veterans Home Loan Program Amendments of 1992. This right is currently unused.
So, as the professors suggest, it's not unreasonable to have the federal government once again set interest rates for FHA and VA loans.
As for equity-sharing--an arrangement where the government would get part of the appreciation for a home in exchange for a lower interest rate--that has actually been tried within recent memory. Under the Hope for Homeowners Act of 2008 (H4H), the Bush Administration designed a program which would allow borrowers with toxic loans to refinance into FHA mortgages to get current mortgage rates and better loan terms.
Part of the original plan was that the government would get 50 percent of any appreciation. The equity-sharing part of the plan was later shelved in favor of a fee, but the change did not much matter: The program has only resulted in a few hundred loans, in large measure because H4H was voluntary for lenders and extinguished all claims by second lenders.
Refinancing all loans would reduce borrower costs and thus make available more disposable income. The Columbia professors estimate that a typical household would save $350 a month, meaning an additional $55 billion per year would be saved--money that could be spent with local merchants, to buy automobiles or simply to reduce debt and improve credit.
Will such a proposal pass muster in Congress? After all, if we could give $1.2 trillion in support for our nation's banks, why not a little financial help for homeowners? Why not take a step which directly helps the public?
In fact, the chance of passage in Washington is remote. The Congress is gridlocked and HUD does not currently have the authority to set mortgage rates. No less important, the idea of federal equity-sharing would undoubtedly set off screams of "socialism" even though it was the Bush Administration which introduced the concept to the FHA, a label that would make passage impossible.