Government Plan Would Guarantee Some Mortgages

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The federal government appears to be on the verge of announcing a massive plan to help homeowners struggling to avoid foreclosure. The plan could involve hundreds of billions of dollars in government loan guarantees.


It's Morning Edition from NPR News. I'm Steve Inskeep.


And I'm Renee Montagne. There's been much talk in this financial crisis of troubled homeowners, but nothing like a bailout for them. Now the Treasury Department and the Federal Deposit Insurance Corporation appear to be close to finalizing a massive plan to keep people with mortgages they can't afford in their homes. As word got out about an imminent deal, the White House responded firmly that no decision has been made among the various proposals being considered. Still, people close to the discussions have been talking to reporters, among them NPR's Chris Arnold who's here with the latest. Good morning.

CHRIS ARNOLD: Good morning, Renee.

MONTAGNE: And so what's going on here?

ARNOLD: Well, if the government does what it looks like the FDIC is proposing here, this could be a very big deal. And we've been covering this whole foreclosure mess for a couple of years now. And it sounds like this plan, as the FDIC and the Treasury have been crafting it, could be by far the biggest event we've seen here as far as helping people avoid foreclosure. And you know, we should stress this is still emerging. The plan could change drastically, you know. But some people familiar with how the plan's taking shape so far say some three million homeowners could get their payments lowered to make their loans affordable, and that number is just so far beyond anything that we've seen here. That would really be a historic effort by the government. And a lot of economists think the economy needs something like this right now.

MONTAGNE: When you say three million homeowners will get renegotiated, if you will, mortgages, what exactly does that mean? Give us an example of what that could mean for, say, one homeowner?

ARNOLD: OK. Again we don't know a lot of the details, but this seems to be modeled on a smaller scale effort by Sheila Bair who's the head of the FDIC. And not everyone's going to qualify. And if you don't have a job, and you bought a $500,000 house, no plan is going to help you. It's designed for people who have a solid income, and they just got in over their heads or got into one of these crazy adjustable loans with a 10 percent interest rate that they can't afford.

But you know, this is for people who if they had lower payments, they could stay in their homes. You know, they have a decent income. And for them, if the lender lowers their interest rate for five years - and that interest rate could go as low as, say, three percent - and that makes the payments affordable, the government would then guarantee the loan. And that's likely to get a lot of lenders to agree to do this because it would protect them against the big losses on foreclosures.

MONTAGNE: Now, you mentioned five years. What happens after five years?

ARNOLD: Well, then the interest rates would slowly start to adjust higher, but they wouldn't go up by that much. And this would be many years down the road when hopefully the economy and the housing market have recovered, and you know, there'd be other options. People could refinance or maybe sell the house, you know, again after the housing market stabilized.

MONTAGNE: So for people who have these high interest rates, they will be getting astonishingly low interest rates for the next five years. Why does the government think it needs to be helping people who got themselves into such big trouble on their mortgages?

ARNOLD: Yeah, you know, there'll be a lot of people who didn't make these mistakes who say, hey, you know, what about me? The basic deal here, though, is that, look, you know, the government's bailed out banks. It's spent billions of dollars. It's continuing to spend hundreds of billions of dollars doing that. It's helped out money market funds who were crucial to the inner workings of the economy. And it's done all kinds of stuff, 12 different things, and each of them has been very big. But it hasn't really done much to deal with the foreclosure mess.

And so economists are now saying, look, this is like the elephant in the room. And foreclosures are at the heart of this whole thing. And we're entering a new phase with foreclosures where there's so many of them that they're glutting the market and bringing down home prices overall. And that's sparking even more foreclosures. So there's this vicious cycle. And there's just this growing recognition that if you want to avoid a really nasty recession, more and more people think the government just has to do more to deal with this.

MONTAGNE: Well, a lot of people will also say if it's in the lender's best interest to cut a deal with borrowers, why isn't the industry just doing that on its own?

ARNOLD: Well, the short answer is that the industry has just been doing a terrible job at trying to do that. These loans are all tangled up inside of big pools with other mortgages, and the companies involved have all these perverse incentives. So the idea here is to give the industry some big carrots to get it to do what makes the most sense for everybody, basically. And at this point, though, it's unclear how much those carrots will cost. We don't have those details, and those are still coming out.

MONTAGNE: NPR's Chris Arnold has been covering the crisis in home mortgages. Thanks very much.

ARNOLD: Thanks, Renee.

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