Are 4.5 percent mortgages worth the gamble?

The federal government can raise long-term debt right now for around 3 percent (actually less--10 year Treasuries are right now yielding less than 2.7 percent). So a 4.5 percent mortgage gives a spread of more than 150 basis points.

If the government-backed mortgages require 20 percent down payments, strong FICO scores from borrowers and full documentation, this is a good deal for the government. The default rate on 30 year-fixed rate, prime, 80 percent LTV and below mortgages remains quite low. Even if life-of-loan default rates for these types of mortgages triple, the taxpayer would earn a positive return on the program. And the value of the call option (ability to refinance) to the borrower would be low, because the program would apply only to purchase money mortgages.

On the other hand, the downpayment requirement, which is essential to making the program sound, will continue to prevent many potential buyers from getting into the housing market. So how effective it would be at stimulating housing demand is questionable.