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...heart of the plan that the Treasury is reportedly considering is the idea that lower mortgage rates will boost home sales and eventually house values. The plan hasn't been officially announced so it's not certain exactly what the Treasury would do, but one way it could work would be for the government to offer to directly purchase all newly originated loans by banks and mortgage lenders provided the loans carry rates of 4.5% or less. Proponents of the plan say the plan would be costless, and might even turn a profit. That's because based on current Treasury...
...raises the question as to whether the government should be offering low mortgage rates all the time, not just during a crisis," says Laurence Yun, chief economist of the National Association of Realtors, which has been pushing for a plan to lower mortgage rates for the past month. Yun predicts lowering 30-year fixed mortgages to 4.5%, from their current rate of 5.5%, would produce an additional 500,000 home sales in the next year. "We need to do this because the economy will not stabilize until home prices stabilize," says Yun. "The way to do that...
...another troubling note, some economist question whether the lower mortgage rates would even boost sales or home values. A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. "The relationship between mortgage rates and home prices is pretty obscure," says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business...
James Hamilton, a professor of economics at the University of California, San Diego, says he used to think that lower mortgage rates were responsible for rising home sales in the first half of this decade, and for that reason he projected home prices would rebound in 2007. He now says rising home sales were the result of deterioration of lending standards and not lower mortgage rates. "I was wrong. The real story with home sales has to do with the availability of credit," says Hamilton. "And credit is tight...
...stop foreclosures. He named a number of possible programs, including a plan floated a few weeks ago by Sheila Bair, who heads the Federal Deposit Insurance Corporation, for the government to pay mortgage servicers $1,000 per modification and split the default risk in order to encourage them to lower the monthly loan payments of borrowers at risk of foreclosure...