All the details haven't been nailed down, but Washington has been buzzing in the past week that the Treasury Department has actually listened to the housing and real estate industries' calls for widescale rate reductions for home purchases.

The rate reduction proposals -- involving government purchases of low-rate mortgages to spur the economy -- have been pushed for the past month by the National Association of Realtors and the National Association of Home Builders.

In one version, a government agency, such as the Treasury Department, could buy 30 year mortgages at below market fixed interest rates of four and a half percent or even lower. In another version, the government could pay loan discount “points” or fees that would effectively lower rates to home buyers by one percent or more.

The idea would be to pull large numbers of people into the housing market to both stimulate construction and move unsold inventories of houses off builders and private sellers' books quickly.

Home sales and purchases are especially effective stimulators of economic activity because they generate huge ripple effects in other industries -- appliances, building materials, furniture to name just a few - and thereby help create jobs.

So would you -- or your clients or friends -- buy a well-priced house if you knew you could get four and a half percent long-term fixed rate financing ?

You bet, and so would potentially tens of thousands of other consumers.

The rate reduction concept has a history in U.S. housing policy that extends back for decades. Most recently it was used by Congress to stimulate home buying in the 1970s, in a program known as the “Tandem Plan.”

In that version, the Government National Mortgage Association (Ginnie Mae) bought below-market interest rate mortgages from Fannie Mae, who in turn acquired them from participating local lenders around the country.

The private lenders and Fannie Mae didn't have to eat the losses involved in making loans at bargain rates. Instead, Ginnie Mae, which is part of HUD, absorbed the difference.

In a more recent proposal inside the Bush Administration, the Treasury Department could actually make money by cutting mortgage rates for home buyers. It could sell federally-guaranteed, super-safe debt securities to bond investors at 3 percent rates, and then acquire privately-originated mortgages at four a half percent.

That sounds like a profitable business model -- and one that just could have a huge impact on housing sales and prices.

Published: December 8, 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, consmer 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.