MELISSA BLOCK, host:
This next story is about a Catch-22 in today's economy. Interest rates are lower than they've been in decades, but many homeowners who are trying to refinance and get those low rates can't qualify. Meanwhile, foreclosures remain at record levels. Some economists say a lot of problems could be solved if the government helped those homeowners get new loans at lower rates.
NPR's Chris Arnold explains.
CHRIS ARNOLD: With Republicans in Washington winning control of the House, a lot of people are asking what kind of meaningful legislation could both parties actually agree on. Well, what about this? A plan to put thousands of dollars a year into millions of Americans' pockets and to do that at no cost to the government. Some economists say they actually have a plan that can deliver on that. It would let all kinds of people qualify for today's low mortgage rates even if they don't have perfect credit or their house has fallen in value, and it would also help people facing foreclosure, people like Bill Trabucco.
Mr. BILL TRABUCCO: I lost my job back in April. First time in 25 years I've ever been on unemployment.
ARNOLD: Trabucco is in line waiting to get into an event in Boston to help people facing foreclosure. It's run by a nonprofit that's rented out a big convention center and brought in bank representatives to meet with homeowners. Five thousand homeowners showed up here.
Mr. TRABUCCO: I'm here like many others seeking relief to hold onto my family home that I've been in for 30 years now.
ARNOLD: Trabucco is an out-of-work emergency medical technician, and he desperately wants to refinance at today's low rates - around four and a quarter percent for a 30-year-fixed-rate loan. That would save Trabucco $350 a month on his mortgage. But he can't qualify for that because he's out of work.
Mr. TRABUCCO: I just don't understand the banks. I really don't understand. I'm not looking for a handout. It would literally be the difference between being safe in my home or having to foreclose in the near future.
ARNOLD: Trabucco finds out at this event that his loan is owned by the government-backed mortgage company Fannie Mae, which has taken around $100 billion in taxpayer bailout money.
Mr. TRABUCCO: So are you kidding me? You got billions of dollars of my taxpayer money, all of our taxpayer money, and you're going to tell me that I don't qualify because I'm on unemployment.
ARNOLD: Now, you might think that banks have good reason not to lend money to somebody who's out of work, but Trabucco isn't borrowing more money. He just wants to refinance what he already owes.
Mr. CHRISTOPHER MAYER (Economist, Columbia University): Look, I agree with him. I think that we should be doing this.
ARNOLD: Christopher Mayer is an economist at Columbia University. He says here's the key thing: Because of the financial crisis, the government has had to step in and offer guarantees on more than 95 percent of new home loans. That's both purchases and refinances. It does that through Fannie May, Freddie Mac and the FHA. Without that guarantee, the banks won't make any loans. And because of that, the government already owns the risk for more than 30 million home loans.
Mr. MAYER: The government is on the hook for about 60 percent of all the mortgages outstanding.
ARNOLD: So since the government's on the hook anyway, refinancing into a cheaper loan payment would just make it less likely for a homeowner to default and cost taxpayers money. So Mayer says it doesn't make sense to exclude people who already have government-backed loans just because they don't have the best credit score or they've lost some income, lower rates would mean lower losses.
Mr. MAYER: And at those rates, this would save borrowers at least $50 billion a year in lower mortgage payments.
ARNOLD: Chris Mayer says that would boost consumer spending and the economy. It would mean fewer foreclosures, and he says there's no subsidy here. Homeowners would just be getting the best rates available out on the market.
Mr. MAYER: The big benefit of this program is it does not cost taxpayers money. In fact, taxpayers might well save money because there would be fewer mortgage defaults.
ARNOLD: As far as the plan's critics, some economists think there would be unintended consequences. They're skeptical that this wouldn't actually cost taxpayers anything as well. And there would be some losers. U.S. homeowners would save about $50 billion a year, but that money would have come out of the pockets of investors around the world.
Chris Arnold, NPR News.
BLOCK: And tomorrow, Chris tells us more about the downsides of this proposal and what its political prospects might be.
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