The US Treasury Department Plan is focused on the most creditworthy home buyers and offers little direct assistance to people struggling with debt and foreclosures on existing homes, according to property and finance professionals who also believe it is just an attempt to keep policy ticking over until president elect Barack Obama takes over in the New Year.
As it stands now, according to bankers and analysts, the plan revolves around a massive new issue of government debt that would be used to buy mortgage-backed securities from Fannie Mae and Freddie Mac, the troubled mortgage-finance companies the government took control of in a September bailout worth up to $200 billion.
The two firms would make this new cash available to home lenders but on the condition they issue mortgages at 4.5%, down from a current average of about 5.5%. But some dismiss it as an attempt to bribe people to buy property at more than its worth.
That difference amounts to $300 a month on a $500,000 mortgage, making it easier to buy homes and, in theory, buoy prices by creating more demand.
But a key assumption behind the proposal is that housing prices are falling because of the current financial crisis. But some analysts say it's the other way around: the current financial crisis represents a housing bubble that's been popped.
'I don't share the view that houses are undervalued now and it's only the credit crisis that's keeping property prices low,' said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.
'Housing prices went up 20% a year in some markets for five years. These houses simply aren't worth what they were. We're not going to be able to bribe people to buy homes for more than they're worth with cheaper rates,' he added.
Property prices need to fall further before the market can stabilize, according to Jack McCabe, CEO of McCabe Research, a consultant to the housing and finance industries. 'If banks aren't willing to lend because housing prices are in a free fall, it doesn't matter if rates go down to 2%. The problem is finding a bottom for this housing market and keeping people in their homes. Trying to simply prop up prices probably won't work,' he explained.
McCabe, one of the analysts who predicted the housing collapse, points out that, historically, average US home prices have been about three to four times median household incomes. But during the recent boom, particularly in high-growth areas like Arizona and Florida, prices rose in many cases to eight times households' income.
He says the current proposal is reflective of the overall approach of the Bush administration, which he expects will contrast sharply with Obama's. 'The difference is they're trying to work from the top down instead of the bottom up. They've been leaving it up to the bankers who created the mess to fix it. But how do you fix if you didn't understand the problem to begin with?'
