Word: plan
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...unmitigated mistake," says Edward Glaeser, a Harvard University economics professor. "The amount of help this plan offers is vastly smaller than the problem. It's just not worth the cost." (Read Four Steps to Ending the Foreclosure Crisis...
...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...
...critics of the plan say that is will do little to boost sales, and could wind up being surprisingly expensive. Here's their math: In order to get lenders to make the loans at below market rates, the government would have to basically pay banks the difference between the market rate and the 4.5% they would like banks to lend at - currently 1%. That would still leave a profit of 0.8% on every loan the government helped originate through the program...
...could ratchet higher in the next few years if the recession drags on. The government could mitigate its losses by only lending to people with high credit ratings. But even high quality borrowers will default at higher rates in a down economy. At a 3% default rate, the plan could cost the government as much as $25 billion a year. And that's only if 10-year Treasury rates remain at 2.7%. A year ago, the government bonds yielded 4%. At those levels, the 4.5% mortgage plan would cost nearly $50 billion a year. Treasury officials declined to comment...