Paulson Denies Rumored 4.5 % Mortgage Rate Plan

The U.S. Treasury Department secretary Henry Paulson spoke out Tuesday denying the rumor that he and the Treasury are contemplating a plan to initiate a 4.5 percent mortgage rate for new home loans issued through Fannie Mae (FNM: 1.04 -7.14%) and Freddie Mac (FRE: 1.23 -1.60%), according to a MarketWatch bulletin. “We didn’t float any plan,” Paulson said. “I am always looking at new ideas and I have said from day one that the key thing to get us through this period is getting housing prices down.”

Paulson was responding to the discussion circling around the rumor that the Treasury Department would soon encourage Fannie and Freddie to issue mortgages with rates as low as 4.5 percent. Instead, Paulson reinforced his support for a Federal Reserve-initiated plan to buy mortgage-backed securities from Fannie and Freddie as a means of driving down mortgage rates.

In mid-November, Paulson announced he would not use TARP funds to purchase troubled housing-related assets and mortgage-backed securities — the original intent of the emergency relief funds — but instead focus on consumer credit and build up capital in non-banks in a revised strategy to boost up the economy.  But apparently it failed to work — or has not worked fast enough — as the Federal Reserve stepped up to the plate earlier on Tuesday and lowered its federal funds and discount rates. The federal funds rate, which has steadily declined through 2008, now stands at a range of zero to 0.25 percent, triggering Wells Fargo & Co. (WFC: 27.12 -0.62%) — along with Wachovia Corp. (WB: 5.27 0.00%) –  to begin lowering prime rates. Both announced Tuesday afternoon they had lowered the prime rate — a benchmark used to set interest rates on corporate and consumer credit — to 3.25 percent from 4 percent.

Interesting to note is Paulson had not commented on the rumors of a mandated 4.5 percent mortgage rate program in the almost two weeks that they had circulated in major news outlets. Ironically, hours after the Fed announcement on the federal funds rate reduction, Paulson walked out into the spotlight and denied the rumors. The peculiar timing of the announcement suggests Paulson may have been waiting for Fed action in reducing the interest rate charged between banks. Or perhaps there was even a bit of a “trial balloon” situation in effect — in which a regulator deliberately leaked news to the media to gauge the public reaction.

On Dec. 4, rumors began circling that the Treasury was considering directly intervening into secondary mortgage markets to help push primary mortgage rates for first-time buyers down to 4.5 percent, according to a report in the Wall Street Journal. News of the potential plan came on the heels of a Nov. 25 announcement that the Federal Reserve would initiate its own program to purchase up to $100 billion GSE direct obligations and $500 billion MBS backed by Fannie, Freddie and Ginnie Mae.

The National Assoc. of Realtors and National Assoc. of Home Builders had been pushing for government-subsidized interest rates to the 4.5 percent level for months, a HousingWire source near Capitol Hill said; the effort has included prominent companies in each field, including home builder Toll Brothers and real estate sales conglomerate Realogy Inc., the owner of the majority of Coldwell Banker and Century 21 offices, said the source, a lobbyist that asked not to be named.

“Our research indicates that an interest rate deduction of just one percentage point could result in as many as 840,000 additional home sales, which would further reduce the inventory of homes by as much as 20 percent,” Lawrence Yun, NAR’s top economist, said at the group’s recent annual conference in Orlando, according to the Sarasota Herald-Tribune.

Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.