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December 05, 2008

Mayer: Low Rates Could Profit Treasury

Catherine New
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The Treasury is considering a plan that may lower mortgage rates to as low as 4.5 percent for people buying homes. Chairman of the Federal Reserve Ben Bernanke discussed the proposal on December 4 (read complete transcript). The plan, still in development, resembles a plan developed earlier this year by Senior Vice Dean Chris Mayer and Dean Glenn Hubbard (read more).

Prof. Mayer, interviewed in the New York Times on December 5, urged the government to consider extending the low rates to existing home owners in addition to new buyers.

"This really is the opportunity of a lifetime," [Mr. Mayer] said. "If you ask someone if this is the time to come into the market, I think anyone who would have bought a house in 2007 and was sitting on the sidelines, or who wants to buy this year or would buy in 2010, would want to take advantage of this."

Mr. Mayer said long-term Treasury rates are so low right now that the government could actually make a profit on the cheap loans. The Treasury can sell 10-year bonds right now and pay only 2.7 percent a year, far below the 4.5 percent that it would be charging home buyers.

But he said his own preference was to make the mortgages available to existing homeowners as well as home buyers.

"I think there are additional benefits one could have by extending the program for people who refinance," Mr. Mayer said. "At 4.5 percent, you might be looking at 25 million people who could refinance and the average savings could be $400 to $500 a month."

He also analyzed the plan on NPR’s All Things Considered on December 4 (listen to audio) and discussed how the move could bolster house prices. He said:

"My own research shows that as many as 1.5 million to 2.5 million people could come into the housing market if such a program were in place. That kind of influx of new home buyers 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. That's an enormous first step in preventing foreclosures because the lower house prices go, the more people face pressure to walk away from their house."