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Fallout: The Financial Crisis

Treasury program to bolster housing

Steve Henn Feb 9, 2009
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Fallout: The Financial Crisis

Treasury program to bolster housing

Steve Henn Feb 9, 2009
HTML EMBED:
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TEXT OF STORY

KAI RYSSDAL: Think for a second about what Nancy said there. Four months after the bailout passed we are still having trouble valuing the assets that would be bought up. And as long as we’re talking about old times, remember that before the banks went bad this was a housing crisis. In large measure, it still is. So tomorrow’s announcement from Secretary Geithner will likely include billions of dollars for mortgage relief.

We asked Marketplace’s Steve Henn how that might work.


STEVE HENN: We don’t know the details yet. But Barney Frank, chairman of the House Financial Services Committee, believes any plan has to include both carrots and sticks. Tomorrow, look for the carrots.

BARNEY FRANK: One incentive will be that, if this all works out, if the holder of the loan agrees to reduce this to a level where the borrower can pay, he, the holder of the loan, will have to take the initial loss but the federal government would then be willing to guarantee the new loan.

One big problem has been that new loans often go into default again.

Thomas Lawler, a housing industry consultant, says Fannie Mae and Freddie Mac could help.

THOMAS Lawler: Fannie Mae and Freddie Mac have been working on financial modeling for years.

The Feds could have Fannie and Freddie set standards for what a properly modified loan looks like.

Lawler: You could then set up a program where Fanny Mae and Freddie Mac could agree to purchase or guarantee those loans.

The hard part will be figuring out who qualifies. Lawler thinks it’s best if homeowners end up with some equity, and pay less than 40 percent of their income on debt. For modified loans to meet these terms, banks will have to take a loss. And a program like this won’t save every buyer.

But for banks the alternative is even worse. Barney Frank is backing a bill that would let federal bankruptcy court judges dictate new terms if banks won’t negotiate.

In Washington, I’m Steve Henn for Marketplace.

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