US politicians have agreed a plan to try to bring down mortgage interest rates for millions of Americans and kick-start the ailing housing market.
Unveiled as part of a package of measures to stimulate the economy, president George Bush said the government-backed mortgage companies Freddie Mac and Fannie Mae would be given an expanded role in financial markets.
The pair are publicly quoted companies which buy and sell mortgages issued by other lenders, and are viewed as central to the housing market. By ensuring there is funding available to mortgage lenders, and because they operate under a federal government guarantee, they encourage lending and help spread home ownership. They have not been allowed to buy so-called "jumbo" mortgages of more than $417,000, but that cap will be temporarily raised to over $700,000 in areas with high house prices. That could slice interest rates on loans by up to a full percentage point and encourage lending in high-price areas such as California, where house prices have crashed.
Economists hailed the move, which comes hot on the heels of the Federal Reserve's emergency rate cut. Together, they could create new refinancing options for mortgage borrowers who are struggling with repayments, and could also tempt new buyers into the housing market. "We may be close to the point where actual sales levels are starting to bottom," Alan Greenspan, former chairman of the Federal Reserve, said yesterday in a speech in Vancouver.
National Association of Realtors figures yesterday showed the housing market was even more sluggish than feared in December. Sales of existing homes were down 2.2 per cent on the month, meaning activity was 13 per cent lower in 2007 than the previous year.
Mr Bush performed a U-turn in agreeing to raise the cap on loans that Fannie and Freddie can trade, but Democrats also gave ground in negotiations over the economic rescue package.