Mortgage plan shows increased gov't role

WASHINGTON -- If you're looking for a mortgage, Uncle Sam may be the only game in town.

The government has already increased its share of the mortgage market to around 90 percent from around 55 percent last year as Wall Street licks its wounds from a sharp spike in defaults, and cash-strapped lenders shy away from almost any borrower who doesn't have platinum credit and a big down payment.

But, with the Treasury Department considering a plan to drive mortgage rates as low as 4.5 percent, the plan being pushed by industry groups as a way to revive the housing market raises long-term questions about whether the government should be the industry's heavyweight and for how long?

Some analysts worry that the government's plan will delay a necessary deflation of the housing bubble. With the government effectively lowering mortgage rates, housing prices could be prevented from falling to their natural level.

"The housing market is getting distorted in new ways," said Bert Ely, a banking industry consultant in Alexandria, Va. "They may end up unintentionally exacerbating the problem they're trying to solve."

Mortgage industry analysts say the government's role in the mortgage market is already so dominant because credit markets are so frozen almost no one else can compete or wants to. But if 30-year fixed rates dropped to 4.5 percent -- down from 5.54 percent Thursday -- it would have a negative impact on banks that issue adjustable-rate loans and keep them on their books, Ely said.

But other observers say the government has few options to keep money flowing to consumers who want to buy or refinance a home.

"We don't have a choice," said Peter Wallison, a former a former Treasury Department official in the Reagan Administration and a senior fellow at the conservative American Enterprise Institute. "The only institution that can possibly rescue the financial system is the government."

As foreclosures and defaults soared, private investors became extremely reluctant to invest in mortgage securities. With that market gone, the only nongovernment source of mortgage money are lenders that make mortgages and hold them on their books.

"It's clear that the private market is not coming back anytime soon, probably not within the next five years," said Guy Cecala, publisher of Inside Mortgage Finance.

Home prices will have to stop falling for at least six months before investors want to dip their toes in the water again, Frederick Cannon, an analyst at Keefe, Bruyette & Woods Inc. "The private market will certainly come back once we have a track record of home prices stabilizing, but that doesn't seem to be in the near term," he said.

Initially, the government's September seizure of Fannie Mae and Freddie Mac helped lower mortgage rates. But doubts remained about the strength of the government's guarantee to the companies' debt, and rates crept back up.

Last week, rates fell sharply after the Federal Reserve announced plans to buy up to $600 billion of mortgage-related securities and other debt issued by Fannie, Freddie and the Federal Home Loan Banks.

Neel Kashkari, who is in charge of Treasury's effort to bailout out the financial system, told a congressional panel Thursday that the agency was reviewing the proposal to push mortgage rates down to 4.5 percent, but didn't provide further details.

And it remained unclear whether the Treasury Department's plan would end up applying only to new mortgages or to refinanced loans.

Economists said a government lending plan that applies only to new loans would provide only a modest economic benefit, compared with a broader refinancing plan that would allow more Americans to get out of expensive mortgages.

"It would help strengthen household balance sheets, and that's something that has to happen before the economy recovers," said Wachovia Corp. economist Mark Vitner.

But Lawrence Yun, chief economist at the National Association of Realtors, said including refinanced loans would be too expensive for the government. By spurring new buyers, the housing market and the economy would be stabilized, he said, adding that "we have to address the source of the problem, which is home prices."