Policymakers to prop up US housing market

An intensified effort to exploit government control of Fannie Mae and Freddie Mac to drive down US mortgage costs and cushion a decline in house prices could start soon. This might begin in the final weeks of the Bush presidency and is likely to continue under Barack Obama’sadministration. By the time it is over, the US taxpayer could own a large chunk of the US residential mortgage-backed securities market. The Federal Reserve has already stated its intention to buy $600bn (€449bn, £401bn) of Fannie and Freddie securities and is interested in doing more. Meanwhile, support is building for a plan to offer government-funded 4.5 per cent mortgages for new home purchases that would be sold by banks, securitised by the mortgage giants and sold on to the government. This proposal – based on an idea by Glenn Hubbard and Christopher Mayer, professors at Columbia University – is being considered by Hank Paulson’s Treasury. Tim Geithner and Lawrence Summers, the president-elect’s economic chiefs, also appear interested. Mr Paulson may launch a version of the plan, offering 4.5 per cent mortgages for new purchases as a final hurrah before leaving office. A more ambitious effort to offer 4.5 per cent loans for refinancing – opening the door to a giant government-sponsored refinancing boom that would put cash in the hands of homeowners to support consumption – could follow. The initiatives reflect a recognition that the US authorities have failed to exploit control of Fannie and Freddie and ultra-low government borrowing costs to drive down mortgage rates. Prof Hubbard told the Financial Times that offering 4.5 per cent loans for new house purchases "would raise house prices by 10 to 12 per cent compared to the baseline" – which he thinks is a further decline of about that magnitude. The plan could be self-financing. If the government borrows at, for example, 2.7 per cent, there would be a risk premium of 180 basis points to cover defaults. That could mean the Treasury would launch the plan without funds from Congress, as long as it remained under the overall statutory debt ceiling. Full Article: [url]http://www.ft.com/cms/s/0/b0570bfe-ca3f-11dd-93e5-000077b07658.html[/url]