Americans for Fairness in Lending

The New York Times

WASHINGTON — After pouring vast amounts of money into financial institutions of almost every type, and having little to show for it, the Bush administration and the Federal Reserve are suddenly taking a new look at ordinary homeowners.

Ben S. Bernanke, chairman of the Federal Reserve, warned on Thursday that the soaring number of foreclosures threatened the economy. He then proposed some ideas — government-engineered loan modifications, and more taxpayer money to help people refinance — to keep people in their homes.

“The public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble,” Mr. Bernanke said. “More needs to be done.”

At the Treasury Department, meanwhile, top officials continued to work on a plan to bolster the housing market by subsidizing 30-year home mortgages with rates as low as 4.5 percent — a level that home buyers have not seen since the early 1960s.

Both actions highlighted how economic policy makers have come almost full circle. Since the financial crisis began last summer, both the Fed and the Treasury had focused almost exclusively on patching up the financial system — propping up banks, Wall Street firms, money market funds and issuers of commercial debt.

But the new focus on helping individuals could create a bitter split between those who want to buy homes and those who already own them. It has already opened up a rift between the real estate industry, which wants to increase sales, and the banking industry, which wants to get out from under staggering volumes of troubled mortgages.

Under a plan that top Treasury officials are weighing, the Treasury Department would underwrite tens of billions of dollars worth of 30-year, fixed-rate mortgages at rates far lower than most Americans have ever seen.

According to Bankrate.com, the 30-year, fixed-rate mortgages fell on Thursday to 5.58 percent, down from 5.76 percent last week. The 10-year Treasury note fell to 2.55 percent late Thursday, a new low.

But the cheap mortgages would be available only for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate.

As a result, the plan offers no direct relief to the millions of people who face foreclosure because they took out exotic mortgages that they could not afford. Nor would the plan offer any benefit to people who have stayed current on their mortgages and would simply be interested in taking advantage of a lower rate. As envisioned by Treasury officials, homeowners who now pay 6 percent would be watching new neighbors arrive whose monthly payments were almost one-third lower.

“At this point, our view is that such a program may do more harm than good,” said Camden R. Fine, president of the Independent Community Bankers of America, which represents about 8,000 small banks.

“You have thousands of banks that made loans and have them sitting on their books, and whose borrowers have worked their rear ends off to make the payments,” he said. “Those people are going to go to their banks and tell them their neighbor just got a 4.5 percent loan, and the banks aren’t going to be able to help them. They’re going to have extremely angry and disgruntled customers.”

But the National Association of Realtors, whose members want to bolster home sales, is lobbying hard for the idea.

“We believe that the only way to really address the housing situation is to increase sales,” said Lawrence Yun, chief economist for the association. “Home prices will not stabilize until we address the inventory problem, and the only way to bring down the inventory of houses on the market is to bring in a new set of buyers. We think this would do the trick.”

Mr. Yun estimated that a one-year program to provide home buyers with an interest rate of 4.5 percent would cost the government about $50 billion. It would result, he predicted, in about 500,000 home sales — an increase of slightly more than 10 percent over today’s depressed sales rate. If the program were extended to people who simply wanted to refinance, Mr. Yun warned, the government’s cost could easily be 10 times higher.

Neel T. Kashkari, the assistant Treasury secretary who is overseeing the $700 billion bailout plan, publicly confirmed on Thursday that the mortgage plan was under consideration but offered no other details.

People familiar with the discussions said Treasury officials were still debating the exact mechanism for financing the cheap mortgages. The main idea is to allow Fannie Mae and Freddie Mac, the government-controlled mortgage-finance companies, to buy up and guarantee 30-year, fixed-rate mortgages paying 4.5 percent interest.

The Treasury would provide the money by buying up the mortgage-backed securities from Fannie and Freddie.

The plan closely resembles a proposal developed by Christopher J. Mayer, vice dean at the Columbia Business School.

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