The Problem with Manipulating Mortgage Rates

by Alex Stenback on February 6, 2009

…is that it might not work all that well and screw other things up in the process.

For instance, despite the Fed having spent some $90 Billion dollars (of $500 Billion set aside – 5 months to go!) in efforts to push mortgage rates lower, they’ve drifted off near term lows, and are sitting in the low 5′s. 

Granted, rates have dropped (from around 6% to the middle to low 5′s – which qualify as historic lows) since the Fed embarked on this mission, but bear in mind that reduction occurred before the Fed purchased dollar 1 in mortgage backed securities. 

Almost $100 billion later and here we are in the same spot.

Which makes it a good time to point out an editorial from today’s Wall Street Journal, which takes the senate to task for considering a proposal to offer fixed rate mortgages of 4%, and the problems this sort of market distortion might cause: 

The problems are price-fixing, taxpayer cost, and a misunderstanding of housing trends. True, the government would not set the prices of the houses themselves. But by fixing the price of home financing, the government would be nationalizing one more branch of the housing market. The feds tried this recently with student loans, and the result is that the private market largely collapsed.

In other words, let’s not replace the market-distorting excesses of the past years with an entirely new set of (taxpayer financed, no less) market distortions that may have unpredictable and expensive consequences.

There is more.  Go read the whole thing.

{ 1 comment… read it below or add one }

DN February 8, 2009 at 10:07 am

From almost every perspective except that of the private student loan lenders, federal student loans have been a success. Correlating the ‘collapse’ of the private lending industry to the rise of government student loans is a bit of a red herring. There were a whole host of things that private lenders were doing that led to the ‘collapse’, not to mention the fall in various bond markets tied to the housing meltdown. Private student loan lenders determined their own fate much the same way as investment banks determined theirs. Government intervention is not even close to being the primary culprit. This WSJ article is brought to us by the same minds that tried to pin the CRA as the root cause of the financial crisis. Nice rhetoric, but questionable logic.

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