I’d be interested in your comments since you have written several times on related topics.

A few questions on this.

1) Couldn’t the risk of the government getting its money back be ameliorated by insisting on, say, 80% or less loan-to-value ratios? Granted, only a subset of borrowers will qualify, but that’s still a big subset, and the hundreds of dollars of extra cash those borrowers will have in their pockets every month will give the economy a fiscal stimulus that can ameliorate the recession.

2) If these mortgages are restricted to L-T-V ratios of 80% or less (with the “V” based on current, post-bust appraisals, of course), then these mortgages would represent legitimate assets for the U.S. government, no? Shouldn’t that help assuage the concerns of the Treasury market, particularly since — even at 4.5% — the government will still be earning a positive spread on these loans, given that its current 30-year borrowing costs are ~3%?

3) More broadly, why isn’t this — taking advantage of 50-year low government borrowing costs — to buy legitimate assets — a useful tack to slow asset price deflation? If the Treasury market realizes that the U.S. government is acquiring assets that will likely retain their value or increase in value over the next decade (e.g., first mortgages with 80% or less L-T-V ratios, investment grade corporate bonds and stocks, municipal bonds, etc.), then won’t the bond market respond to these investments more benignly than it would if the federal government just increased expenditures (e.g., on transfer payments as a form of fiscal stimulus) without acquiring assets in return? Do you think, for example, that a basket of U.S. equities or investment grade corporate bonds, for example, purchased at current prices won’t increase in value over the next three decades? Do you think most investors in Treasury securities doubt that?

Here’s my logic: as the interest rate gets lower, it allows increasingly marginal borrowers to buy, most of whom are really stretching to make even that reduced payment. When there is economic stress, they will be among the first to be insolvent.

The other effect is bailing out the solvent through refinancing. Lots of articles on that today:

http://www.ritholtz.com/blog/2008/12/mortgage-refinancings-soar/

http://www.portfolio.com/news-markets/top-5/2008/12/04/treasurys-housing-plan

http://online.wsj.com/article/SB122833771718976731.html?mod=testMod

Weird stuff — we are not only going for the hair of dog that bit us, we are trying to consume the whole pooch/hooch.

The govt wants to peg rates to 4.5%, buy loans from GSEs, take on more risky assets, cause they truly think that 5.5% mortgage rates are unafforadable.

Here’s the thing.

IF YOU CANT AFFORD TO BUY HOME WITH RATES AT 5.5%, THEN YOU SHOULD NOT BE BUYING ANY HOME AT ALL!

Clearly they are going to do something because there is an adverse feedback loop in effect here. Housing prices fall further, securities value falls further and spreads to higher quality securities, downgrades come, capital raising must occur, banks get in more trouble, lend even less, and on and on and on.

This cycle has to play out, and there are plenty of investors out there waiting to put money somehwere in the system; stocks, bonds, corp debt, commodities, housing, etc..

We should at the very least consider alternatives if the govt is adamant on doing something to stabilize house prices to slow down the loop. Why not consider enhancing the 1031 deferrment benefit to an exemption with CONTROLS, that would entice investors to buy distressed houses from supply, buy foreclosures, fix them up, and rent them out. Prices will still fall because the market forces will always win out. But this may slow the 2nd derivative or pace of declines, in a supply side manner without govt meddling with mortgage markets or buying up loans from GSEs.

Im with you, but Im afraid the govt is going to do something anyway, and it seems to me that there should be alternatives considered to stimulate housing. I think this is one such idea.