It was the biggest housing mystery in Washington last week: What happened to the Treasury Department's much-ballyhooed plan to cut mortgage rates to four and a half percent to stimulate home buying?

Under the plan, Fannie Mae and Freddie Mac would buy loans at four and a half percent and the Treasury would subsidize the difference between that and market rates.

But last Tuesday, in an interview on the CNBC cable network, Treasury Secretary Henry Paulson basically said: Who me? We never announced any such plan. It got leaked prematurely.

Paulson also hinted that he would be reluctant to launch such an ambitious and potentially costly program without having the tacit support of the incoming Obama administration's Treasury team.

The National Association of Realtors, which had proposed the rate buydown concept to Treasury weeks ago, again called for the federal government to find a way to lower rates to four and half percent.

Meanwhile, new reports surfaced that a second plan was being considered: Under this alternative, the 12 Federal Home Loan Banks around the country would offer cut-rate mortgages using money raised by bond issuances at 3 percent by the Treasury.

According to the Reuters news service, this concept is being pushed aggressively by the president of one of the banks -- Alfred DelliBovi of New York -- and is under active consideration by the bank system's top regulator, James Lockhart, director of the Federal Housing Finance Agency.

The net effect of either plan would be the same to consumers: Sharply lower monthly mortgage costs. For example, here's what a four and a half percent rate does to principal and interest payments compared with a note rate of five and half percent: On a $200,000 mortgage, the one point difference would reduce payments by $122 a month.

One a $300,000 loan, the savings would go to $183 a month. And on a $400,000 mortgage, costs would be lowered by $244 a month.

In his comments on CNBC, Paulson said his department would like to cut home buyers' payments: "We're continuing to look at (that)," he said, "and we wouldn't be doing our jobs if we didn't look at other ideas to reduce mortgage interest rates."

Meanwhile, with market rates tumbling to five percent and below, a half point rate buydown could cost the government much less than originally estimated.

Then again -- there's always the possibility that to stimulate a REALLY big round of home buying, rates could be cut to 4 percent.

After all, it's the holiday gift season … and the housing industry could sure use one.

Published: December 22, 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.