Treasury considering mortgage rate plan

WASHINGTON (AP) - The head of the government's financial system rescue effort said Thursday the Treasury Department is considering a program to encourage banks to make mortgage loans at low rates to help revive the battered housing market.

Under the proposal being pushed by the financial industry, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It's unclear exactly how much the plan would cost.

Asked about the proposal during his testimony before a Senate Appropriations subcommittee, Neel Kashkari said that it was one of the options the administration had under review.

Treasury is striving to use the "right tools for the right job" in an effort to help as many homeowners as possible, said Kashkari, the department official in charge of the $700 billion rescue effort.

The goal of the industry's proposal would be to take advantage of the unusually large difference, or spread, between mortgage rates and yields on government debt. On Thursday, the yield on the 10-year Treasury note yield sank to a record low of 2.56 percent, while the national average rate on a 30-year fixed rate mortgages was 5.54 percent, according to financial publisher HSH Associates.

In recent years, there has been about a 1.8 percentage point difference between the yield on a 10-year Treasury note and a 30-year mortgage rate, but that spread currently hovers around 3 percentage points.

Analysts said that the government could use its ability to borrow money at low rates to in essence flood the market for mortgage-backed securities. This increased demand would tend to push down the yield on mortgage securities sold by Fannie and Freddie, which now average about 5.5 percent because of investor concerns about default risks. Once those yields fall, the theory goes, lower mortgage rates should follow.

That would have two benefits for the economy: Immediately adding money to the pocketbooks of homeowners who can refinance their mortgages and reduce their monthly payments, and eventually help arrest the slide in home prices since much lower mortgage rates would allow more potential buyers to qualify for loans.

Kashkari said the administration believed it was critical that the $700 billion rescue program maintain the flexibility and resources it needs to address new challenges as they arise.

Those goals were essential for the Bush administration's remaining time in office, but also to leave the fund with the resources needed to meet challenges that will be faced by the incoming administration of President-elect Barack Obama, Kashkari said.

"As we consider potential new ... programs, we must maintain flexibility and firepower for this administration and the next, to address new challenges as they arise," he said at a hearing of a Senate Appropriations subcommittee chaired by Sen. Richard Durbin, D-Ill.

The panel met in Chicago and Kashkari appeared by satellite. His remarks were distributed in Washington.

Treasury Secretary Henry Paulson said Monday the administration was looking for more ways to tap the $700 billion program and planned to consult with Congress and the incoming administration before introducing any new programs.

Also Thursday, Federal Reserve Chairman Ben Bernanke called on the government to ramp up efforts to stem soaring home foreclosures, which are feeding into the ongoing recession.

Bernanke outlined a number of options, including:

_ Easing the terms of a government program called "Hope for Homeowners," which lets distressed homeowners refinance into more affordable, federally insured mortgages if the lender writes down the amount owed on the mortgage and pays an upfront insurance premium.

_ Easing the terms of a loan-modification plan put forward by the Federal Deposit Insurance Corp. that seeks to make monthly mortgage payments more affordable. The FDIC put this plan into effect at IndyMac Bank, a large savings and loan that failed earlier this year, and has used it to modify mortgages at other financial institutions.

_ Having the government purchase delinquent or at-risk mortgages in bulk and then refinance them into the "Hope for Homeowners" or another government program that insures home mortgages.

In his testimony, Kashkari said Treasury was "aggressively" examining various strategies to mitigate the rising tide of foreclosures and maximize loan modifications to help more people stay in their homes.

The administration has been authorized by Congress to use the first $350 billion of the rescue program. After initially indicating to lawmakers that he did not plan to tap the second $350 billion before President George W. Bush leaves office on Jan. 20, Paulson is now reviewing that decision.