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RENEE MONTAGNE, host:

This is Morning Edition from NPR News. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep, good morning. The Treasury Department is considering another big and expensive plan to boost the economy. This one would seek to drive mortgage rates for homebuyers as low as four and a half percent. The Treasury is not talking about this plan publicly, and sources close to the matter tell NPR, quote, "that nothing is imminent." But as NPR's Chris Arnold reports, the move is under consideration.

CHRIS ARNOLD: Sources say the super-low interest rates would only be for home purchases, not refinancings. The idea is that the trouble in the housing market is at the heart of the financial crisis, and lower interest rates would prop up that market by making it cheaper to buy a home. So the government's considering moves that could create the lowest interest rates in more than 50 years.

Professor CHRISTOPHER MAYER (Senior Vice Dean and Professor of Real Estate, Columbia Business School): This is a great plan. This would have a very significant effect on the housing market.

ARNOLD: Chris Mayer is an economist and dean at Columbia Business School who's been calling for this kind of action. He's been arguing that the credit crisis is making mortgage rates artificially high right now compared to other interest rates, and he says that there are things the government could do at little or no cost to the taxpayer. He says if Treasury is in fact considering that, this is a very big deal.

Professor MAYER: The government announcing a mortgage below five percent would for many people be a once-in-a-lifetime opportunity to borrow money at that rate and buy a house, an opportunity that their parents never saw in their lives.

ARNOLD: Mayer says home prices have already fallen sharply around the country, so they're getting more affordable. So he thinks the low rates would entice a lot of people who've been waiting to buy homes.

Professor MAYER: My estimates suggest that as many as a million and a half to two and a half million home purchasers would come into the market.

ARNOLD: If that happened, Mayer says it would cut by half the number of unsold homes. He says that would really help stabilize prices, and that in turn would be good for the struggling economy. But some other economists are skeptical that the impact would really be that dramatic. Mark Zandi heads up Moody's Economy.com.

Dr. MARK ZANDI (Chief Economist, Moody's Economy.com): Because of the increase in unemployment, because of the low confidence, because of the expectation prices are going to continue to climb for a while, people are going to be reticent to even take the government up on this very attractive offer.

ARNOLD: Nariman Behravesh is chief economist of Global Insight.

Dr. NARIMAN BEHRAVESH (Chief Economist and Executive Vice President, IHS Global Insight): The program would be far more effective if it also encompasses refinancing. That could make a huge difference.

ARNOLD: Zandi agrees. And Chris Mayer has done some research on this too. He thinks 25 to 30 million Americans could save hundreds of dollars a month by refinancing at those low rates.

Professor MAYER: So if you're a household thinking about, you know, all right, I've got my five-year-old car and when am I going to replace it? And suddenly your mortgage payments drop by $450 a month. Well, that's the payments on the new car. So the effect of that on improving consumer spending would be enormous.

ARNOLD: There would still be problems. Mark Zandi doesn't think any of this will do much to help the foreclosure mess, and that's a big drag on housing and the economy. Also, if the government just offers the cheap interest rates to homebuyers and not people looking to refinance, it would be creating a two-tiered mortgage market. Some worry that that could have unintended consequences. For example, now that word of all this has leaked out, that actually could hurt the housing market in the short term because there's an incentive for homebuyers to hold out for the chance of a lower rate.

Mr. DAVID KOTOK (Chairman & Chief Investment Officer, Cumberland Advisors): That's right. Why should I buy a house today with a five-and-a-half-percent mortgage rate if I can wait a month or two and buy it with a four-and-a-half-percent mortgage rate?

ARNOLD: David Kotok is chief investment officer at the money management firm Cumberland Advisors. He says because of that, the government really can't take much longer to announce what it's planning to do. Chris Arnold, NPR News.

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