The Treasury Department wants the federal government to effectively buy up all mortgage loans in America, by selling treasury bonds to buy up mortgage-backed securities. In exchange, lenders would have to charge a ridiculously low interest rate of 4.5% for a 30-year mortgage, which is lower than inflation in many years, and way lower than people with even perfect credit receive now.
The Treasury proposal will put taxpayers on the hook for tremendous potential losses if borrowers default, with little upside, thanks to the low interest rate. It's the same kind of stupidity that led to the collapse of government-backed mortgage lenders Fannie Mae and Freddie Mac, which followed federal mandates to encourage "affordable housing" and "diversity" by buying up risky subprime mortgages that defaulted, and then had to be bailed out by taxpayers, even though they were already receiving billions of dollars in taxpayer subsidies.
But the idiots at Treasury think the government will actually make a profit, by issuing federal bonds (which are exempt from state taxes and carry 3 percent interest rates for 30-year terms) to buy up mortgages. Fat chance, even if you falsely assume few borrowers would default, and that all that borrowing wouldn't drive up interest rates beyond their current low level.
And even if Feds did make a profit, it would be at others' expense: to buy up all the mortgages, the Feds would be increasing government borrowing so much that private banks would have a harder time attracting deposits (increasing the likelihood of more $700 billion financial system bailouts in the future), and state and local governments (which are now seeking a federal bailout) would have more difficulty issuing their own bonds to pay for highways and schools. And businesses would then have a harder time borrowing money to finance expansions that could create jobs.
The Treasury Department's proposal is a more extreme version of the foolish policies that spawned the mortgage bubble in the first place and will have all sorts of perverse side effects.
Meanwhile, the FDIC is busy rewarding mortgage deadbeats at failed banks by cutting delinquent borrowers' mortgage payments to 31 percent of their income (many people who are current on their mortgage pay more than that) and doing that by cutting their interest payments to 3 percent or less, rather than extending the term of their mortgage. Fed Chairman Ben Bernanke wants to expand that program and make it even more costly to taxpayers.