How would Treasury’s plan work?
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Kai Ryssdal: Nothing about the housing market is simple in this economy — least of all how the Treasury’s plan might work. Or whether it will at all. So we’ve called an expert.
Susan Wachter is a professor of real estate at the University of Pennsylvania. Good to have you with us.
Susan Wachter: Pleasure.
Ryssdal: As you just heard Steve Henn tell us, the Treasury Department is thinking about trying to get mortgage rates down quite a bit to 4.5 percent. How are they going to do that?
Wachter: The concept is to use Fannie Mae and Freddie Mac, which are there, to bring capital to the housing market and to use the Treasury, working with Fannie and Freddie, to get the rates down lower.
Ryssdal: How exactly are Fannie and Freddie going to work together to get those rates down though?
Wachter: You know if they have cheap funding. And right now Fannie and Freddie are under conservatorship, they’re federal government entities. If the Treasury makes the funds available and directs that the rates come down, it will happen.
Ryssdal: As I understand it, this program is for new buyers of homes that are on the market. It wouldn’t do anything for people who want to refinance to get out from under mortgages they can’t get afford anymore. So, if I have it right, that wouldn’t really fix the forclosure problem we have would it?
Wachter: No, it will not fix it. It will indirectly help it because part of the problem is that people who can’t make payments on their loans, can’t sell their homes either. So if we expand the home ownership base and some of those homes that have no choice but to go into foreclosure, they can be sold. And that of course is a win win. So, it’s not a direct response to the foreclosure problem, but it will ease it up.
Ryssdal: Doesn’t it though sort of get us to where we were getting into this crisis in the beginning, which was people who perhaps should not have had homes, getting into them in the first place?
Wachter: Absolutely. Overly liberal lending standards, erosion of lending criteria was a key problem. But this would be not those crazy, no down payments, no stated income. And the qualifications for a loan will remain pretty conservative. So, it’s not going to go to all potential buyers by any means. In that sense it will be rather constrained.
Ryssdal: Much has been written that mortgages and fixing the housing problem are at the root of an eventual economic recovery. Do you think this finally is going to do it?
Wachter: Absolutely not. This is part of the solution. This will help in getting the housing market back to stability, but the problem still remains that overhang of foreclosures, which has it’s own dynamic of driving down prices, which leads to more foreclosures. That too has to be addressed indirectly.
Ryssdal: Alright so what do you do when Henry Paulson calls you and says, ‘Professor Wachter help us out. What else can we do?’
Wachter: Well, there’s a whole series of potential plans that are out there. Sheila Bair has a plan for the FDIC. It’s going to require that some pain is accepted all around. The current loans are simply unaffordable. These loans that were made a few years ago at rates that people simply could not pay back. So, the lenders will have to adjust the terms.
Ryssdal: Susan Wachter, a professor of real estate and finance at the Wharton School at the University of Pennsylvania. Thanks very much.
Wachter: My pleasure.
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