SCOTT SIMON, host: The Obama administration is considering several new ideas to help shore up the struggling housing market. As first reported by The New York Times this week, one proposal would allow homeowners with government-backed mortgages to refinance them at the current, lower interest rates. For more, we turn to Christopher Mayer, a professor of real estate finance and economics at Columbia University. He joins us from Long Island, New York. Thanks for being with us.
CHRISTOPHER MAYER: Great to talk to you, Scott.
SIMON: In 2008, you, along with two others, proposed a version of this refinancing plan. Help us understand it and why you think it's a good idea.
MAYER: Well, one of the big problems in the financial crisis has been trying to help borrowers out from under the problems they have caused by falling home prices and malfunctioning financial markets. Most businesses have been able to take advantage of low interest rates to reduce their borrowing and are actually pretty profitable these days. But homeowners have had a much harder time reworking their debt the same way that businesses and, you know, corporations have. So in essence, our proposal is to try and open up the lending markets so that what the Federal Reserve is doing in lowering interest rates can make it through to homeowners who haven't been able to benefit. And these are people who have been current on their mortgages, so we restrict this, this is not for people who are defaulting, this is for people who are current on their mortgages.
MAYER: And those people are, you know, families who have been hammered by the recession. So we think that this money would - some of it would be saved, some of it would be spent, but this is in a savings every year. And so in terms of instilling confidence by consumers in the economy again, having a $70 billion a year tax cut is a pretty significant thing for spur economic activity among a broad group of middle income households.
SIMON: At the same time, are there some potential disadvantages we ought to be alert for?
MAYER: Well, there's no such thing as a free lunch. You know, the biggest concerns about a program to open up refinancing have been, one, that bondholders would take the losses; they'd get paid off early. And the second is, what would the impact be on the government budget deficit? We have put together a plan that I think can deal with the government budget deficit. The harder part still is bondholders because by refinancing their debt and lowering their payments, homeowners would then be paying less interest to bondholders and obviously bondholders don't like that.
SIMON: Can you see why, professor, following a period where the lending institutions were accused of being too generous and not scrupulous, would that kind of lending would now tighten up in a new market?
MAYER: Well, we don't actually have a private market. The, you know, the government is in one way or another backing almost 95 percent of all mortgages that are being originated. But, you know, today for example, if you were to go in and get a mortgage and have a very good credit score, let's say that you would be a, you know, a 699 credit score and you were putting 20 percent down on your home. This is not a, you know, no money down, no job - fully verified income - you would pay between a half and three-quarters of a percentage point more for your mortgage than so the lowest available rates. That I think is too tight. In order for you to get the lowest rate today, you would need to have a 40 percent down payment and a credit score of 700 and better. And I think we need to have some kind of reasonable guidance for what is a fair rate to charge for somebody who is really a responsible purchaser to get a home. And I think we've swung too far in the other direction in terms of tightening credit.
SIMON: Christopher Mayer is a professor of real estate finance and economics at Columbia University. Thanks so much for being with us.
MAYER: Very nice to talk to you, Scott. Transcript provided by NPR, Copyright NPR.