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Bad Housing Ideas, Part I: Paying Banks to Lower Mortgage Rates

The administration’s rescue plan for housing is taking shape. But as Calculated Risk notes, one thing it apparently won’t include is a proposal – once under serious consideration – to pay mortgage companies to lower interest rates.

Instead, as we discussed Thursday, Obama officials are looking at ways to standardize loan modifications to lower homeowners’ monthly payments, and to get the loans restructured on a widespread scale using model similar to the Federal Deposit Insurance Corp.’s program, The New York Times reports.

An earlier proposal called for the government to give taxpayer dollars to mortgage companies to lower rates, according to the Wall Street Journal. If the mortgage company shaved a point off the interest rate, the government would match that.

I spoke to Dean Baker, co-director of the Center for Economic Policy and Research, about this idea, when it was first mentioned. It made no sense to him, he said, because it amounted to the government bailing out banks, instead of homeowners. Why should the government be paying mortgage companies to do anything, he asked. They should be agreeing to loan modifications to avoid the larger costs of foreclosures, not because the government might pay them to do it. A proper incentive might be for servicers to collect a standard fee for the work involved – but that’s very different than paying mortgage firms to lower interest rates.

Calculated Risk called the mortgage payments a “dumb idea,” and said it was a good thing it appears to be gone from the latest proposal.

Keep in mind that the high interest rates on loans from mortgage companies played a huge role in the foreclosure crisis. Giving them taxpayer dollars to lower rates would only send the message that if you swindle borrowers by putting them into loans they can’t afford, the government will come by someday and make up the difference.

Let’s hope other whacko housing ideas don’t make their way into the final plan.

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