Paulson Still Doesn’t Understand Housing’s Problems

Treasury Secretary Hank Paulson once again reveals his appalling misunderstanding of the Housing market and its problems today when he floated his latest idea to “Stem Home-Price Declines.”

There are two problems with Housing:

  1. Ultra low rates and an abdication of lending standards put 3 – 4 million people in homes they could not afford. The real costs of home ownership have been forcing many of these people to move back into more affordable quarters (i.e., rentals).
  2. By just about every measure, home prices remain significantly elevated over historic metrics.And given the chain of sales that accompanies any existing home sale — the starter home/move up home/bigger house/even nice home/downsize retiree — anything that keeps home prices out of reach of the starter and move up buyers damages the entire chain fo purchasers.

Excerpt:

“The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new loans, according to people familiar with the matter.

The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.

Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.

Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.

Bad idea, Hank.

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Sources:
Treasury Considers Plan to Stem Home-Price Decline
Rates Could Be as Low as 4.5% for Newly Issued Loans
DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, December 3 2008
http://online.wsj.com/article/SB122833771718976731.html

Paulson Considers New Plan to Lower Mortgage Rates
Robert Schmidt and Dawn Kopecki
Bloomberg, December 3 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=axAJBzAz986w&

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