December 16, 2008 / 6:59 PM / 11 years ago

U.S.-backed banks could be mortgage aid tool: sources

WASHINGTON (Reuters) - A network of government-backed lenders could become a conduit for fresh mortgage financing under a plan being mulled by U.S. policy-makers, sources familiar with the plan said on Tuesday.

The Treasury Department could offer below-market financing to the Federal Home Loan Bank systems so that the dozen regional lenders could offer below-market home loans.

Under a plan being mulled by the banks’ regulator, the Treasury might buy a large bond with a yield around 3 percent which would give the Federal Home Loan Banks cheap cash to make home loans at around a 4.5 percent annual rate, the sources said.

The Treasury has for weeks been brainstorming on how it might ease the costs of homeownership and entice potential buyers with lower interest rates. It has been looking at a number of proposals.

Under one plan Treasury officials have been weighing that has previously surfaced publicly, home loan finance companies Fannie Mae FNM.N FNM.P and Freddie Mac FRE.N FRE.P would soak up new mortgages and push interest rates down to a target, like 4.5 percent.

Treasury Secretary Henry Paulson said on Tuesday, however, that officials are not ready with such a proposal.

“We’re continuing to look at — and we would not be doing our jobs if we didn’t look at — other ideas to reduce mortgage interest rates,” he told CNBC television.

The latest idea would give the Home Loan Banks the chore of making investments to lower mortgage rates.

“Everyone agrees that we need to return to sound underwriting standards. Well, our member banks have always held those standards, so this is a natural fit,” said one Home Loan Bank official who asked not to be named but supports the plan.

The Federal Home Loan Bank system makes low-cost loans to its member banks after selling its debt in the capital markets. The banks hold federal charters and a mandate to expand affordable housing.

PRESSURE GROWS

Alfred DelliBovi, president of the Home Loan Bank of New York, has been a proponent of the plan and the National Association of Realtors has also been a booster.

Any new policy to marshal Fannie Mae, Freddie Mac or the Home Loan Bank must be blessed by the enterprises’ regulator, the Federal Housing Finance Agency.

James Lockhart, the agency’s director, is reviewing several new programs to stimulate the housing market as set forth by leaders of the Home Loan Banks and the Realtors, said an agency spokeswoman.

In a letter sent earlier this week, the NAR argued that a drop in 30-year interest rates from their recent 5.5 percent level to 4.5 percent would increase home sales by 500,000.

Leading Democrats in the U.S. House of Representatives have strongly criticized Secretary Paulson for not doing more to prevent foreclosure, as was envisioned by legislation that created a $700 billion fund to stabilize financial markets.

The first half of those funds is dwindling and Paulson would likely have to ask Congress for additional resources if he were to conceive another ambitious program to help the market.

Reporting by Patrick Rucker; Editing by Dan Grebler

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