Treasury's 4.5 Percent Mortgage Plan Analyzed Fed Chairman Ben Bernanke has outlined what the government needs to do to fix the mortgage crisis. Christopher J. Mayer, senior vice dean and Paul Milstein professor of real estate at Columbia Business School, talks about what the plan would entail.
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Treasury's 4.5 Percent Mortgage Plan Analyzed

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Treasury's 4.5 Percent Mortgage Plan Analyzed

Treasury's 4.5 Percent Mortgage Plan Analyzed

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From NPR News, this is All Things Considered. I'm Michele Norris.


And I'm Melissa Block. Now to the housing market, a new idea is being floated to try to turn things around. Federal Reserve Chairman Ben Bernanke spoke today at a Fed conference on housing finance. He said as the economic crisis has evolved, the relationships between housing and other parts of the economy have become more complex.

Dr. BEN BERNANKE (Chairman, Federal Reserve): Declining house prices, delinquencies and foreclosures, and strains in mortgage markets are now symptoms as well as causes of our general financial and economic difficulties.

BLOCK: Bernanke outlined options to help those facing foreclosure. At the same time, the Treasury Department is considering a plan aimed at reviving the housing market. But it's aimed at people who want to buy a home, not those facing foreclosure. The plan would lower mortgage rates for homebuyers to as low as 4.5 percent. This plan is similar to one proposed recently by economists Glenn Hubbard and Christopher Mayer of Columbia University Business School. And Professor Mayer joins us now from New York. Thanks for being with us.

Professor CHRISTOPHER MAYER (Senior Vice Dean, Columbia University Business School): Thank you for having me.

BLOCK: And as you understand what the Treasury Department is considering here, who would be eligible? How would this plan work?

Prof. MAYER: My understanding from the reports I've read are that this mortgage would apply to people who are purchasing houses in 2009 and would involve mortgage rates as low as 4.5 percent.

BLOCK: And how do you get to a mortgage rate that low? What has to be done?

Prof. MAYER: Well, it would seem crazy to think that you can offer mortgages that low. But in fact, the federal government can now borrow money, 10-year Treasury, at below 2.7 percent. So, there's still an enormous spread between that mortgage rate and the 10-year Treasury, which actually allows taxpayers to not have to subsidize these mortgages. These mortgages would well be profitable for taxpayers.

BLOCK: The idea behind this, I gather, is that this would in a sense float all boats, float all houses in a way, stop the decline in housing prices and raise the value of existing properties. How does that happen with low interest rates?

Prof. MAYER: Think about your typical listener. There is pretty much nobody listening to this program today who in their lifetime has seen a mortgage rate for a 30-year fixed-rate loan at 4.5 percent. This is really an opportunity of a lifetime to buy houses at a historically low price and live in that house for a long time. Because of course, the benefit of this program is only if you live in it. So, I - my own research suggests that as many as a million and a half to two million people are likely to come into the housing market in 2009 if such a program were in place.

That kind of an influx of new homebuyers pulls a lot of inventory off the market. That then stops the decline in house prices and eventually leads house prices to turn the other direction. And that's an enormous first step in preventing foreclosures, because the lower house prices go, the more people are going to face pressure to walk away from their house.

BLOCK: The idea that the Treasury is considering here would apply only to new loans, not to refinance and not to people facing foreclosure. Is this really the right group to be targeting here?

Prof. MAYER: I think this is - this should not be a question of which group, but we should be looking at all of these groups. I believe that the government will look seriously at extending this program over time to people who would want to refinance and to people who are facing foreclosure. And part of my proposal has always been that we work on ways to help people facing foreclosure so that they can refinance out of their old securitized mortgage into a new 30-year fixed-rate loan that they can understand, that they can afford. But remember, many of the mortgages out there are sitting with mortgage rates anywhere from five and three-quarters to people with subprimes as high as eight percent. A 4.5 percent mortgage represents a 15 to 35 percent decline in their monthly payments.

BLOCK: Professor Mayer, why shouldn't we look at what's going on now as a necessary correction to a wildly inflated bubble in housing prices. Prices were just too high, and now they've come down. And that's just - maybe just about where they should be.

Prof. MAYER: Right. So I don't view this as a program that's about pushing back house prices to the levels that they were. That's - that would be a foolish policy. I look at this in a world where the markets are predicting house prices are going to fall another 12 to 18 percent in the next 18 months. The damage to the economy of that happening would be enormous. This program isn't about re-inflating house prices. This program is really about preventing what could be an even larger economic catastrophe from happening.

BLOCK: Well, Professor Mayer, thanks very much.

Prof. MAYER: I enjoyed talking with you, Melissa. Thank you.

BLOCK: Christopher Mayer is senior vice dean of Columbia Business School.

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