The Administration proposes to allow all existing mortgages currently owned or guaranteed by Fannie Mae and Freddie Mac (F&F) to be refinanced at current market rates, as long as the loan balance does not exceed 105% of the current house value. The benefit is that borrowers will face substantially lower payments if their mortgage rate falls from, say, 6.5% to 5%. Two comments:

1) The plan is clever in that F&F already hold the default risk on these mortgages, and providing a lower contract rate actually reduces this risk.
2) The plans fails to recognize that whatever the borrower gains from a lower mortgage rate, the investor who was holding the old mortgage loses. It is thus a complete wash in terms of overall spending power in the economy. Of course, you may feel more kindly to borrowers than to investors, but remember that the investors may well include your pension account, your bond fund, and your local bank.

Using Fannie Mae and Freddie Mac to Buy Mortgages and Mortgage Securities

The goal here is to lower mortgage interest rates by using F&F to purchase mortgage securities. Two comments:

1) We are told nothing about which mortgage securities and at what prices the purchases are to be made. It seems that F&F are now basically bankrupt, so any further losses for the firms really come at the expense of the US Treasury and taxpayers. This is not a free lunch, and again it must be asked if this is the best use of scarce Treasury resources?
2) The plan’s goal here is to lower mortgage rates by buying mortgages funded with new Treasury securities. The transactions will surely narrow the spread between mortgages and Treasuries. But this could raise Treasury rates as much as it lowers mortgage rates. Raising Treasury borrowing rates is incredibly expensive, because all new Treasury debt must pay the new higher interest rate. Is buying mortgages the best use of Treasury resources?