Will Bailout Aid Home Prices?

MELISSA BLOCK, host:

The underlying problem behind the current freeze in credit markets is housing: foreclosures, defaults, plummeting home prices. Millions of people can't afford their mortgages, and that has caused Wall Street a huge amount of money. So, as Congress and the Bush administration continue wrangling, the question remains: What could a rescue plan do to slow foreclosures or stabilize home prices? For that, we turn now to NPR's Chris Arnold.

CHRIS ARNOLD: The foreclosure mess is like a Katrina-sized hurricane for the housing market and the whole financial system. And so, the hope is that any bailout, if there actually is one, can do two things. First, it needs to shore up the financial levees that have started to collapse in the past couple of weeks. Princeton economist Alan Blinder.

Mr. ALAN BLINDER (Economist, Princeton University): The first several dams have broken, and water is spilling out into the floodplain, taking down a lot of firms. And it's probably now one inch away from Main Street and ordinary people's lives, so we need to dam the flood.

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ARNOLD: That part involves the government buying up bad debt, but the foreclosure storm is still out there. More than a million more people are likely to lose their homes; that number could go even higher. That pushes down home prices in entire neighborhoods, which sparks more foreclosures.

Mr. BLINDER: That is what's at the base of all these problems, so that is the root of it.

ARNOLD: Blinder thinks any package must stop unnecessary foreclosures. For example, there are a lot of people who have decent jobs and who could probably afford to keep their homes if they had a cheaper interest rate. The idea is by helping them, you help the whole economy. But Blinder says the original version of the bill gave too much power to Treasury Secretary Henry Paulson.

Mr. BLINDER: I was very much worried before that the Treasury would pay not enough attention to that end of the problem. There is still that danger because the secretary has a huge amount of discretion.

ARNOLD: At least, he did in that last version of the bill that got voted down. Bruce Marks heads up the Neighborhood Assistance Corporation of America. He says when the government took over Fannie Mae and Freddie Mac, which own a lot of loans that are going in to foreclosure, Paulson didn't tackle that problem.

Mr. BRUCE MARKS (CEO, Neighborhood Assistance Corporation of America): We're extremely worried. He controls Fannie and Freddie, and he has done nothing to stop the foreclosures or to make the mortgages affordable. The problem is, is the foreclosure is stupid, and he doesn't get it.

ARNOLD: By contrast, Mark says the head of the FDIC, Sheila Bair, took a very different approach when she took over the failed IndyMac bank. He says Bair put foreclosures on hold and aggressively set about figuring out which homeowners could afford their loans under different terms and which couldn't.

Mr. MARKS: If Paulson was to incorporate the Sheila Bair standard, that would save millions of homeowners from foreclosure, and that would benefit everybody.

ARNOLD: One thing is for certain: The industry is not doing this on its own. Mark Pierce is the deputy banking commissioner in North Carolina. He says that the government's been pushing the industry to do more, but he estimates as few as one in 30 homeowners facing foreclosure are actually getting any meaningful help from their lenders.

Mr. MARK PIERCE (Deputy Banking Commissioner, North Carolina): And that is actually getting worse rather than better over the last few months. So, we need better approaches. And we've been asking for over a year for that to happen, and it hasn't happened yet.

ARNOLD: But economist Alan Blinder is still optimistic. He's hopeful that increased oversight in any emerging bailout will give Congress enough clout to address foreclosures and to deal with the heart of the problem. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.