Are 4% mortgages the answer?

The great thing about the ideas that the Republican leadership are putting forth is that it puts on display just how intellectually bankrupt that party has become.
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Even a fifth-grader can see what is wrong with this plan.
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First, are we not in the situation that we find ourselves currently because Wall St., Main St. and every other street got drunk on cheap credit? Everybody can't be given a house and a mortgage unless they are credit worthy. Further, if you go out and look at the numbers of folks who are credit-worthy but have not been received a loan, it is guaranteed to not be large enough to effectively goose the economy for new houses. By definition, if we have more available housing than credit-worthy buyers under 2007 standards which were too lax, this is nothing more than a subsidy to those marginal few who are more creditworthy and prudent (or lucky enough) not to have purchased in the bubble.
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Second, credit-worthiness is primarily a function of income. To have income, one of three things must happen to you. a) Trust-fund b) Lottery or craps table in Vegas c) steady job. And most folks fall into this last category. They will have to have a steady job.
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Third, I go back to my exhibit A from earlier.
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http://articles.moneycentral.msn.com/Investing/SuperModels/why-the-bank-bailouts-are-doomed.aspx
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Many of our largest institutions are insolvent and will effectively require nationalization. Just like the car companies will require nationalization to remain a money-losing entity. Just like AIG, etc. There is no getting around it. As much as Republicans hate to swallow their pride, under these conditions in this situation, the free-market and tax-cuts will not save itself. The party that has supported smaller government for years is now forced, when their proposal are shown the light of day, to embrace government in large doses as the answer.
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As a final quibble, I should note that when the loan guarantees cover greater than 50.00% of the banks books, the American people effectively has nationalized that bank. I predict that this will first happen to Bank of America, somewhat fittingly. The really perverse part of all of this is that we will be owners in name only while effective control will be with the management that allowed the banks to fall into that situation in the first place.

The Fed's senior loan officer survey also came out today: 47.1% of U.S. lenders surveyed said that they've tightened their lending standards on prime mortgages over the past three months.
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IMHO, lenders should be loosening their standards on prime mortgages because very often those standards are utterly arbitrary, and not an indication of the likelihood that the loan will be repaid. I know this from personal experience; I was selling one house (owned free and clear) that I was willing to use as collateral that was worth three times the loan I was trying to get for another house, and the rates I was quoted were outrageous. This was mostly because my credit score sucked -- and that was mostly because I didn't use credit cards, and paid in full for everything (including the original house -- which I had gotten dirt cheap, and which more than quintupled in value because of "location, location, location").
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A very large part of this problem is the centralization/consolidation of the financial industry, that depends on "formulas" to determine creditworthiness, rather that an approach that is simply based on the question of whether the mortgage will be repaid. One consequence of this crisis should be the elimination of mega-banks; we'd be far better off relying on a host of small, local banks to process most loans, and rely on wall street to fund the largest "investments".

pluk,
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The unraveling of Citi and I suspect later in time of BoA will take care of a lot of that problem.

HA...I'm may be credit worthy today but laid off tomorrow.

It won't do that much for the economy if the mission of our government is to get people out of 5% mortgage and into 4% mortgages. In a survey I created on Mortgage News Daily, http://www.mortgagenewsdaily.com/ 90% of the loan officers surveyed claimed that insufficient equity kept their borrowers from refinancing. The rest were divided between insufficient income and credit scores dropping since the original purchase. So holding out a 4% rate to the majority of people in financial trouble is like putting a big juicy steak just out of the reach of a starving person.

Until they put some serious funding behind modification (including a bonus for taxpayers when the housing market turns around)troubled borrowers are going to see precious little help from this plan. But it will be a sweet bonus for those already doing well. No wonder America is so overfed.

i posted an hour ago. what gives?

Giving people who are paying 5% on their mortgages a 4% rate isn't going to do much for the economy. According to a survey I conducted on Mortgage News Daily http://www.mortgagenewsdaily.com/, 90% of those loan officers surveyed cited insufficient equity as the biggest obstacle to refinancing. The rest claimed insufficient income or dropping credit scores as the main problem. So those who most need help are unlikely to be saved by lower rates. That's like putting a huge juicy steak just out of reach of a starving man--cruel and not helpful. But it will be a nice perk for those who don't need the help.

Barbara,
Nice post...Did the criticisms of this idea not fully sink in with lawmakers when this idea was first floated months ago (when the WSJ thought they were breaking the story -- when it turned out to only be a discussion of an idea)?

What happens when this program runs its course? Lawmakers are just asking for another bubble to burst.

It's odd to me that this idea is being spearheaded by Republican leaders who usually don't support government interference in the marketplace.

What are you permanently damaging by approving this?