Zero Percent Financing For Everything

The major car companies have been offering zero percent financing on most of their models for several months now. That deal even applies to seven-year loans. It may have stimulated sales. In a bad economy, it is hard to tell.

Yesterday, Microsoft (MSFT) announced it would offer zero percent financing to medium-sized business to stimulate sales.

According to The Wall Street Journal, "Gayle Hoshino, a Microsoft director of pricing and licensing, says the company got a positive response to a similar pilot financing program it started in Canada in July." That would make sense. It is a remarkably good deal.

As the government struggles to improve the housing crisis, one thing is clear. People do not want to buy houses because their value is falling. They are also out of the market because bank credit is tight and many mortgages still carry a 6% interest rate. Annual compounding turns that into a pretty big nut over a 30-year period.

The federal government has Fannie Mae (FNM) and Freddie Mac (FNM) working on extending and resetting all sorts of home loans. That will take months, at least. Those months are precious as the economy continues to fall and housing prices continue to falter.

One of the options banking regulators, the Fed, and the Treasury have is to offer zero-percent mortgages to new homeowners and similar terms to people who are struggling to stay in their homes. The banks who make the home loans would have to get a credit for that, but Treasury still has several hundred billion dollars to spare. Cutting mortgage interest rates may put the "good" homeowner who makes all of his payments, as good credit, and has a 6% mortgage at a disadvantage, but the government has already shown it is willing to be selective in who is helps and who it ignores.

The Fed has already set interest rates at 1% and there is some speculation that the number will drop again. Lending to financial institutions is a tricky business. Not all of them will survive.

Homeowners are probably a better risk.

Douglas A. McIntyre