Republicans Propose Different Stimulus, Targeted at Mortgages and Homeowners

Senate Republican lead Mitch McConnell (R-KY) introduced a radically new economic stimulus approach. McConnell requested an amendment to the House economic stimulus bill entering the Senate. This radical departure from the Democrat engineered economic stimulus would give government-backed low-interest mortgages to homeowners.

Spreads continue to widen between the cost of funds to lenders and the rate at which mortgage loans are being offered. This indicates a continued unwillingness, or uneasiness to lend. Banks continue to hedge their capital positions against troubled loans still on their balance sheets. This is driving Republicans and Democrats to review the TARP program objectives--moving focus down to homeowner effects.

With millions of adjustable-rate, interest-only, and negative amortization loans about to reset throughout 2009 and 2010, lawmakers are bracing for another wave of mortgage crisis. These borrowers are trapped by continuing drops in home equity and a generally frozen consumer credit market.

The Republican proposal would take aid directly to these at risk homeowners with government-subsidized mortgage rates. Shaving over a percentage point off the prevailing rate of 5.3 percent (30-year fixed-rate mortgage), these mortgages would be offered at 4 percent. The loans would be absorbed by Fannie Mae and Freddie Mac.

The concept is to allow borrowers to refinance out of their pending troubles instead of continuing to attempt throw rescue nets once they begin to fail. This program would entice new buyers into the market to absorb excess housing inventory, provide affordable mortgage refinancing, and add more cash flow to these homeowners' budgets.

A similar proposal was made in November 2008 by homebuilders, but gathered little support. Their program proposal was modeled after a successful Ginnie Mae program in the 1970s that subsidized new home buyers with rates of 3.5 percent.

The National Association of Realtors has come out in support of this Republican plan and reportedly President Obama and Senator Schumer (D-NY) are considering the proposal in earnest.