It seems that everybody is looking to Capitol Hill right now for a bailout: the Big Three auto manufacturers, banks, insurance companies, Wall Street titans.

But real estate and housing advocacy groups are floating a very different "b-word" -- "buydowns" -- or interest rate reductions on mortgages to stimulate more purchases of new and existing houses.

The buydown idea is not something dreamed up by builders or Realtors for the current tough market. Rate buydowns were used successfully during the 1970s, when Congress authorized the Government National Mortgage Association, "Ginnie Mae," to subsidize rates on mortgages funded through Fannie Mae.

Ginnie Mae essentially bought low-rate loans from Fannie but paid for them as if they carried higher, prevailing market rates. The government absorbed the difference.

Back then, it was known as the "Tandem Plan." Though neither the National Association of Home Builders nor the National Association of Realtors has spelled out the mechanics, both are urging the incoming Obama administration to include some version of a Tandem Plan-type buydown in its economic stimulus package expected as early as January.

The builders' buydown proposal is the more aggressive -- and expensive. It would cut rates on loans for new and existing homes to 2.99 percent, fixed for 30 years, for people who buy between now and next June 30. On purchases from July 1 through December 2009, mortgage rates would be fixed at 3.99 percent.

The home builders make no bones about their objective here: By slashing mortgage rates drastically, the plan would jolt buyers off the sidelines in droves, stabilize prices, get rid of unsold inventories, and send positive ripple effects through the economy as a whole.

The Realtors also favor some type of buydown plan. Chief economist Lawrence Yun has called for at least a one-point rate reduction, but they want to leave the details up in the air for the moment to see what the new administration might find acceptable.

So how likely is it that we'll see rate buydowns anytime soon? At the moment that's unclear. Any form of national buydown would be expensive -- the builders estimate the one year cost of their plan at $130 billion or more.

But there's precedent and there's little question that buyers would respond to even a modest rate subsidy. The main question is: Can a new Congress and new administration fit this into their already bulging package of promises to other needy causes?

And do they accept the core idea here that if you stimulate the housing sector, you stimulate the economy as a whole?

Published: November 24, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.