The Politics of Four Percent Mortgages

In the midst of the recent stimulus debate, an innovative Republican proposal emerged that would allow banks to refinance mortgage loans at fixed interest rates as low as 4%. But if you missed it, it's understandable. It was immediately killed by the Democratic majority and essentially ignored by the mainstream media. However, since late December, the Federal Reserve has been pushing mortgage rates lower, both through the purchase of mortgage-backed securities and by providing more capital to Freddie Mac and Fannie Mae. Rates for qualified borrowers fell from 6% to 5% in barely three weeks and have remained at that low level.

So will mortgage rates fall to 4%? And should they? And why exactly was that Republican proposal defeated?

First, let's be clear as to how much money falling mortgage rates can put in consumers' pockets. The average home price is about $200,000, and let's assume that entire amount is financed with a 6% mortgage.  A reduction to 4% would save the homeowner $4,000 in interest costs every year. Multiply that by the 85 million homes in America and we get $340 billion in interest savings.

And this isn't a one-time economic stimulus. That $4,000 is a permanent reduction in household expenses that the borrower can rely upon, as long as they continue to make their mortgage payment. Imagine the boost that could provide to the economy and the pressure it could take off America's cash-strapped families. It may even jump-start the new home sales market.

If a straightforward mortgage rate reduction that puts $340 billion in homeowners' pockets every year and could slow or stop further housing declines sounds like a simpler and better alternative than the $787 billion of phony tax rebates and pork barrel spending that was just passed by the Democratic Congress, then you're probably starting to understand why this Republican alternative wasn't widely debated.

What's even more egregious is that as the massive spending bill was being written in marathon backroom deal-making sessions, President Barack Obama continued to make the false claim that Republicans wanted to do nothing in the face of the crisis. This proposal for lowering home mortgage rates was just one of many alternatives that was introduced by the Republicans, including Senator Lindsey Graham's package of personal and corporate tax cuts.

The mortgage rate reduction proposal was killed, not because Democrats didn't agree with it, but precisely because it was a reasonable alternative that could have sparked intelligent discussion on the best way to improve the economy. When you're trying to push an $800 billion spending spree through Congress in the dead of night, the last thing you want is an intelligent discussion. But the fear mongering and false choices worked and the stimulus bill was passed. Where does that leave interest rates? Falling quickly most likely.  Now the Democrats need the economy to recover to ensure a 2010 reelection, and the easiest way to do that is to keep interest rates and mortgage rates as low as possible.