Treasury Trying To Force Mortgage Rates Lower

Washington, DC, Dec. 4, 2008--The Treasury Department is developing a plan to try to reduce mortgage rates on home loans to 4.5 percent on typical mortgages by expanding its purchases of mortgage backed securities, sources familiar with the plan said on Wednesday.

The plan would see mortgage finance companies Fannie Mae and Freddie Mac expand their purchase of mortgage securities to help drive down borrowing costs, the sources said.

The 4.5 percent target interest rate is roughly one percentage point lower than the average rate currently on a 30-year, fixed rate mortgage.

Both the mortgage giants, which finance or guarantee about half of all U.S. mortgages, were effectively nationalized by regulators in September after losses on mortgages eroded their capital.

Since they were taken over, the two largest sources of U.S. mortgage finance have become tools for policymakers who want to lower the cost of home loans and break a wave of foreclosures.

The move would supplement a program announced last week by the Federal Reserve under which it plans to buy up to $600 billion in assets and debt from government-sponsored enterprises like Fannie Mae and Freddie Mac, one source said.

The announcement by the Fed last week helped to lower home mortgage rates by about a half-percentage point and sparked a jump in refinancings among homeowners.