The Washington Post “Treasury Weighs Action on Mortgage Rates” reports that the Treasury is considering a plan to have banks issue 4.5% 30-year fixed rate mortgages which Fannie Mae (FNM) and Freddie Mac (FRE) purchase. The Treasury would then “possibly” fund the purchases with 3% bonds. The structure of the Treasury’s transaction with the GSEs is not defined. Neither are the fees that the GSEs would collect for the transactions.

What is defined is that borrowers would have to qualify for GSE conforming mortgages and refinancing would be excluded. Borrowers would still have to buy mortgage insurance if they have less than 20% to put down. Mortgage insurers have grown far stricter. GSE and origination fees will increase the effective interest rates.

The Treasury’s premise that extremely low interest rates will allow buyers to pay up for homes, putting a floor under housing prices. This makes no sense for several reasons. First, no one will pay above market just because they could afford to by a lower cost of financing. The house will still have to appraise based on its value to all buyers, not just those able to finance cheaply. Second, the 4.5% rate is not sustainable over time so prices will have to drop back to levels supported by higher mortgage interest rates. Third, foreclosures will not be reduced because refinancings are excluded. Though the plan might support a few short sales helping the banks.

So who is the plan aiming to help? It might entice some of the most financially secure buyers to step forward faster. It also has the potential for the banks to collect fees without encumbering their balance sheets. Fannie and Freddie might also benefit by collecting fees if the new loans are transferred to the Treasury’s balance sheet or their interest rate risk is mitigated by matched long term financing.

On a separate subject, Fannie and Freddie are discussing with their conservator how to maintain their share prices above the NYSE listing threshold. The talk of a reverse stock is misguided. Without instilling investor confidence, their share prices would simply drop back to under a dollar again with nothing accomplished. The Treasury has to determine whether stockholders have a future and communicate the answer unambiguously. Anything short of this will leave the stock valued at no more than a lottery ticket – no matter how many shares are outstanding.

Disclosure: Author is long FNM and FRE.