Partisan battles over the economic stimulus plan continue, as Republicans try in vain to push mortgage rates down with government subsidies.

If only Angus MacGyver were here! Certainly he could solve this mortgage crisis, and with nothing but a Swiss Army knife and a stick of chewing gum. Unfortunately, since MacGyver was cancelled in 1992, we have to rely on politicians and legislation to do the trick.

Fueling demand for new homes

When President Obama's economic stimulus plan was put before the Senate, Republican senators criticized it for being stuffed with spending proposals that ultimately won't help the economy. Since the House version of the plan passed without a single Republican vote, they took a stand to put their own spin on solving the mortgage crisis. The Republican vision included three key strategies:

  • Government subsidies to push mortgage rates down to 4 percent
  • $15,000 tax credits to homebuyers
  • Assistance to homeowners whose mortgage loan balance was greater than the market value of the mortgaged property

The core of this vision is the belief that the housing market can be healed by driving demand for home purchases. Mortgage rates of 4 percent, along with $15,000 tax credits, could fuel that demand by significantly reducing the cost of home ownership. A $300,000 mortgage financed at 5 percent carries a principal and interest payment of about $1,610. But lower that rate to 4 percent, and the payment drops to about $1,432. For those households with high annual tax bills, the tax credit would cover the closing costs of the purchase.

Playing party lines

Not surprisingly, Democratic senators weren't wholly supportive of the Republicans' housing push. Some, in fact, questioned the Republicans' motives for becoming suddenly concerned with the mortgage crisis. The Democrats also argued that the economic stimulus plan passed by the House already addressed housing, by way of a $7,500 tax credit for homebuyers.

The version of the economic stimulus plan that the Senate approved on February 10, 2009, did include the $15,000 tax credit. But Republicans were unable to win support for the subsidized mortgage rates.

Mortgage rates could fall anyway

In December, James Lockhart, Chairman of the Oversight Board of the Federal Housing Finance Agency, stated publicly that the government's efforts to fix the mortgage crisis could send mortgage rates to "well below 4 percent." This commentary came after the Fed's announcement that it would buy up mortgage-backed assets, but before the Republicans began pushing for the mortgage rates subsidy.

MacGyver's not around anymore to weigh in on whether 4 percent mortgage rates actually would fix the housing problem. It may be that the right solution is the action plan nobody wants to consider: waiting for housing prices to fall back down to where they'd otherwise be, had the bubble never happened.

Published on March 4, 2009