MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The U.S. housing market at the center of the 2008 financial meltdown is showing signs of revival. Home prices were up last quarter by the largest percentage increase in seven years. A recent survey suggests consumer confidence in the industry may be going up as well.

MS. DIANE REHMJoining me to look at what's happening in the residential real estate market: Dean Baker of the Center for Economic and Policy Research, Doug Duncan, chief economist at Fannie Mae, joining us by phone from Daytona Beach, Fla., Mark Zandi, chief economist of Moody's Analytics. Feel free to call us, 800-433-8850. Send us an email to drshow@wamu.org. Follow us on Facebook or Twitter. Good morning, gentlemen. Good to have you with us.

MR. DEAN BAKERGood morning. Thanks for having us here.

MR. DOUG DUNCANGood morning.

MR. MARK ZANDIGood morning. Thanks for having us.

REHMMark Zandi, let me start with you. What are the trends in the housing market this year, and how do they compare to last year?

ZANDIThey're much better. Home sales have started to move higher. Housing construction, home building is beginning to improve, particularly for apartments, mostly family property. But even single family construction is beginning to pick up. And, of course, most notably, house prices are rising, and they rose quite strongly in the spring. And the price games are fairly strong across the country, in many parts of the country.

ZANDISo the trend lines are all very good, and they compare very, very favorably from where we were. The level of activity is still obviously very low. Home sales, construction price is still very low compared to where they were before the housing market crashed. But the good news is that things are improving.

REHMWhat about refinancing?

ZANDIThat's booming. Given fixed mortgage rates that are now 3.25 percent, these are record-low mortgage rates. We are in, of course, some changes to some government programs, like the HARP program for Fannie and Freddie borrowers. We're seeing a lot of refinancing activity. In fact, the only constraint on more refinancing is the ability of the mortgage companies to do the refinancing. They don't have the capacity to do more. So it's boom times in terms of refinancing.

REHMDean Baker, definitely a bounce?

BAKERYeah, I would definitely agree with most of what Mark said. I mean, we have seen a turnaround. House prices bottomed out towards the end of last year, and in most markets. I'm not going to say everywhere, but I'd say most markets, they have hit bottom. And they do seem to be going up. The one thing I would differ a little bit with Mark on -- he's absolutely right. We haven't recovered to the boom levels. I don't expect us to.

BAKERBut if you look at something like home sales, we're pretty much on our long-term trends. If you compare our sales today with where we were in the mid-'90s, we're basically about on that trend. So the idea that sales are weak, that's only a truth if you compare it to the bubble. But if you compare that to basically any other period, they're about where you should expect them to be.

REHMWhat about the second half of this year? What do you expect?

BAKERI would be surprised if house prices don't keep going up. And, you know, as Mark said, it's a positive contributor to growth. We are seeing an increase in construction across the board. He's right that apartments, but also single family homes -- we have a long way to go to get back to said normal level of construction. But it is going in the right direction. So I'd say it's mostly a positive story.

REHMDoug Duncan, Fannie Mae has been conducting surveys for a few years now. What are the trends?

DUNCANThere are several. First of all, as to the question about whether people still want to own homes, that hasn't changed at all through the crisis. The share of people that eventually want to own a home is in the 80 percent range, where it's always been. There's clearly been a shift to the view that renting is OK to get yourself in a financial position to eventually own. And so we're seeing a rebalancing where the home ownership rate is coming down and rentership has rising.

DUNCANAnd, of course, part of healing the housing market is transitioning some of those houses that were going to be owner-occupied into rentals, and you've seen a lot of discussion of that. The public is aligned with that. The other thing is that, whereas they are not optimistic about the direction of the economy and they're kind of flat in their personal financial expectations, there has been a significant improvement in their view of the housing market which is consistent with the data that you've heard Mark and Dean reference.

REHMEarnings reports out for Fannie Mae and Freddie Mac earlier in the week quite positive.

DUNCANDefinitely, and you saw there the impact of the improvement in house price recently which was significant and impacted the reserves expectations and the loss expectations of the companies and allowed us to report significantly improved earnings results.

REHMBut, overall, still pretty modest, right?

DUNCANOh, absolutely. We're -- you have to decide what you mean by normal if you're going to talk about, for example, when do we get back to normal? I tend to focus on the construction space because you eventually want to get to a place where you're building the number of homes that are required to replace obsolete homes and add enough homes to house the increases in population and households. In our forecast, that happens about 2015.

REHMWhat would you term normal?

BAKERWell, I think we typically would have around 1.2 million units being built a year. We're currently -- I haven't seen the latest numbers -- I think, around 700,000, 800,000, so we have quite a ways to go. I mean, we are down the levels, construction levels, we hadn't seen since the early '60s. So we really had fallen through the floor. And, by contrast, we're up over 2 million units a year at the peak in '05, '06. So we had a huge amount of overbuilding that lead to record vacancy rates.

BAKERIt's one of the reasons why, and some others were saying, we had a bubble because it doesn't make sense if you have record high prices and record vacancy rates at the same time. So we had record vacancy rates. Those have started to come down. We're back to about the '02 levels. And, again, agreeing with Doug, that that would tend to contribute to a situation where we see increased building and probably 214, 215 to get to a more normal level of construction. That sounds right to me.

REHMDean Baker of the Center for Economic and Policy Research. Doug Duncan, he's chief economist at Fannie Mae. Mark Zandi, chief economist of Moody's Analytics. His most recent book is titled "Paying the Price: Ending the Great Recession and Beginning a New American Century." Do join us, 800-433-8850. Back to you, Mark Zandi. Prices were apparently up, especially at the lower end of the market. Talk about why.

ZANDIWell, one of the major waits on house prices has been all of the sales of properties that had been in foreclosure. So a lot of foreclosure sales, a lot of short sales, and this depresses prices, particularly where you -- where it affects parts of the market like the low end, like the middle parts of the market in particular in many parts of the country. And so those segments of the housing market have been very significantly depressed.

ZANDIThe good news -- and this is one of the reasons -- one of the key reasons why house prices have risen so strongly in recent months -- is that the number of properties that are being sold in foreclosure or short sales have started to come down particularly relative to a more normal non-distressed sales. And so that caused prices to jump. And, in fact, in some of the most distressed markets across the country -- previously distressed markets across the country, we're seeing some really big price gains.

ZANDIYou know, Phoenix would be a really good example of that. Miami would be another good example of that as well. So it's the decline in the number of distressed properties for sale that's really starting to help lift house prices in many parts of the country.

REHMGive me an example of the kinds of percentage increases you're seeing in those lower end houses.

ZANDIWell, I've got better data for the total market. So, for example, like in Phoenix, this is -- as I mentioned earlier, this morning, we got some data from the National Association of Realtors. And year over year, through the second quarter, Phoenix house prices are almost -- are up almost 30 percent, which is, you know, quite incredible, obviously very, very low levels. I mean, house prices in Phoenix got crushed during the crash, but they're up 30 percent.

ZANDIMiami house prices are up 10 percent. Minneapolis house prices are up about 10 percent. We still -- there are some markets where we're still seeing some price declines, around New York, still very weak. Some parts of the southeast like Mississippi, Alabama, still some price decline, South Carolina. But the really distressed -- previously very distressed markets, like in Arizona, Florida, California, even in parts of Nevada now, we're starting to see these really big price increases again because the number of properties that are stressed for (unintelligible).

REHMOK. And, Dean Baker, there are still -- you've got, what, 3 million properties in some stage of foreclosure. How did that -- how does that affect the overall market?

BAKERWell, that's a drag. Let me come back to that in a second 'cause I did want to thrown one more thing to that...

REHMSure. OK.

BAKER...that I think is part of the story of the turnaround. We had the first-time buyer's tax credit kick in. That was part of the stimulus that went in place in February of '09. It originally ended in November, and then it was extended through April of 2010. Now, part of the story of the falling and then rise in prices is that first-time buyers tax credit pulled a lot of purchases forward particularly at the bottom end of the market because obviously most first-time buyers were at the bottom end.

BAKERSo that was why, as soon as that ended, prices basically fell off a cliff, so the second half of 2010 into 2011. We're now recovering from that. So I think that's part of the story is why we're seeing the stronger movement at the bottom. Basically, they had fallen so much. Now, getting back to your question, yes, we have somewhere around 3 million homes in the process of, you know, delinquency, foreclosure, and that will be a drag on the market.

BAKERI mean, the positive side, you could say about that, is those numbers are falling slowly, but we are seeing a reduced rate of foreclosure. Some of that is, you know, simply so many people have been foreclosed already. But some of that is the banks, I think, are being better now about making modifications, trying to find ways to keep people in their home. I mean, part of the story is they lose when you have a foreclosure. And I think that, you know, they realize that very often, it makes sense to do a modification of principal right down. They come out ahead in that picture.

REHMAnd in our next segment, we'll talk about why Fannie and Freddie are not able to do principal reductions. We'll take your calls. I look forward to hearing from you.

REHMAnd we're back talking about the U.S. housing market which seems to have picked up slightly in the first half of 2012. Here's an email: "What is an obsolete home, as referenced by one of your guests? Why is the emphasis on building new rather than remodeling?" That's from Francile in San Antonio. Dean Baker.

BAKERWell, obsolete home, I mean, Doug was the one who raised that.

REHMOK.

BAKERI mean, in principle, you can have homes that, you know, are beyond rehabilitation, and it's cheaper to tear them down than to rehab them. I'd...

DUNCANYeah, that's right. And there are also in this circumstance, to Dean's point earlier about the supply -- the excess supply that was built while vacancy rates were rising, some of those properties were built at a cost level that is unsustainable to the folks whose income would require them to live far out. And so they're simply not going to be usable and will probably be torn down. There are also cases like Hurricane Katrina where properties are damaged beyond repair, but the people still have to have a place to live, so you would build a new property (unintelligible).

REHMOK. And here's one more from John in Cleveland. "Where are they gathering their facts from? Here at ground zero in Cleveland, there is no improvement. It's still very difficult to get financing. I've been looking for over a year, had to go through my credit union at work to get financing. If it weren't for the credit union taking a personal interest in employees where I work, I couldn't get it. Also, I've noticed abandoned development up for sale, so, if construction is so good, then why are these construction sites abandoned and for sale?" Mark Zandi.

ZANDIWell, the person makes a really good point about Cleveland. Cleveland's still very depressed. The economy is still quite tough, and the housing market is still not doing well. House prices in Cleveland are still declining, so what he's looking at is in the data. That is exactly what's happening to the Cleveland economy. And he brings up an excellent point about the availability of mortgage credit. This is still one of the major constraints on housing demand and home sales.

ZANDIFannie Mae, Freddie Mac, the FHA are lending, but no one else really is. Private mortgage lenders still are very, very reluctant to make mortgage loans because of all the things that they've been through. And so they are a very small part of the market, and their underwriting standards or credit standards, you know, the credit scores they require and the down payments they require are very, very onerous, at least compared to historical standards.

ZANDIAnd so it's tough to a get a loan unless you, you know, you have a very good credit score, you have a great job, good incomes, and a good down payment. So this is still very much a problem. Hopefully, as the housing market continues to improve and lenders become a little bit more comfortable with -- about things, they'll start to extend more credit and get easier with their underwritings terms. But at least so far, it's still pretty tough, and this is indeed a major constraint on the housing market.

REHMAll right. And let's talk about what's going on with Fannie and Freddie. Edward DeMarco, who's acting director of the Federal Housing Finance Agency, said that he will not allow principal reductions for Fannie and Freddie. What do you make of that, Doug Duncan? What are the reasons behind that?

DUNCANWell, he's our conservator, and he's -- as our regulator and conservator, he's responsible to the public for how we deploy resources to the public as put into the company in -- so he's done an estimation about the net effect on taxpayers and concluded that principal reduction isn't the way to go. That does not preclude us from executing on a lot of other policies and attempting to help troubled homeowners, which we are, things like alternative strategies for refinancing them.

DUNCANFor example, the HARP program is an example of one where traditionally people who owe more on their home than its worth wouldn't get an opportunity to refinance, but, in fact, the whole lid off the ratio between the value of your home and your mortgage has been lifted. And you've seen a significant response of people who are underwater refinancing.

REHMSo, Dean Baker, the Obama administration, Democrats on Capitol Hill, housing advocates, all are saying, why is Edward DeMarco standing in the way here? Is this a political decision?

BAKERWell, it's a decision that's certainly hard for me to understand. I mean, the most recent analysis -- they'd done an analysis a few months back that basically said that if you did a write-down of 115 percent -- everyone who's underwater more than 115 percent, write-down to 115 percent, it was basically a wash in terms of their current policy modification. So you go, that's no loss to you. More recently with the new subsidies that the administration's put in place, which Fannie and Freddie would get, they would actually gain money by doing principal write-downs. Freddie would...

REHMFannie and Freddie would gain money.

BAKERAnd what Mr. DeMarco said was, well, that's true that the enterprises would gain money, but the taxpayers as a whole would lose money. So I -- and I think many others thought this was very extraordinary. He's saying, well, this would cost the taxpayers money. Now, he's the conservator for Fannie and Freddie. He's not the Treasury secretary. So I thought this was sort of an extraordinary position.

BAKERI mean, he didn't also take into account the mortgage interest deduction and all sorts of other policies. He didn't decide whether these were, you know, saving the economy as a whole money. And that, of course, is in his job.

REHMMark Zandi, what do you think?

ZANDIWell, it's a tricky question. I mean, I sympathize with Mr. DeMarco's decision. He -- it's a tough one. If I were king for the day, I think I would've asked Fannie and Freddie to engage in principal reduction. It probably would've helped 3-, 4-, 500,000 very well, and it would've helped the housing market quite significantly. So, you know, I can see where he's coming from -- decision, but if I were making the decision, I probably would've made a different one.

REHMAnd here's an email exactly to this question. "What about those of us underwater, how do we finance? I owe $125,000." Zelo (sp?) says, "My house is for $72,000. I'm locked in at 6.5 percent. My lender will not allow me to refinance because I'm underwater. What do people like me do? I can afford to pat, but I feel like I should walk away because they won't work with me." Dean Baker.

BAKERWell, that is a really tough one, and, you know, unfortunately, you have many banks that have taken a hard line on this. And, you know, in many cases, people do exactly what you said. They're going to walk away because you're ending up paying, you know, close to twice the value of your house, which, for a lot of people, they'll say it doesn't make sense. Now, you get a strike on your credit record, obviously, if you end up defaulting.

BAKERBut, you know, that may well be the better decision in many cases. Ideally, what you'd like to see is the bank negotiate, have a principal write-down, have a lower mortgage rate. They are not likely to see that. I mean, I have no idea what this particular person will decide to do, but most people will not end up paying that.

REHMMark Zandi?

ZANDIYou know, Diane, I missed the question, so I didn't quite hear it.

REHMOK. Well, this guy is underwater. He owes $125,000. His house is worth $72,000. He's locked in 6.5 percent. The lender won't refinance because he's underwater.

ZANDIYeah. Well, it sounds like it might be a Fannie/Freddie loan. That would be the first question, if it's a Fannie/Freddie loan. As Doug was pointing out, there is a program called HARP -- that's an acronym that is a program that is designed to help this kind of an individual. So that's possible. If it's not a Fannie/Freddie loan, maybe it's an FHA loan. The FHA also has programs to help these people.

ZANDINow, if it's not Fannie, Freddie or FHA -- and he can find that out, and he should find that out -- then it's more -- it's going to be very difficult for him 'cause the private lenders, the big mortgage companies at this point are still very reluctant to refinance that mortgage. But, you know, many, many mortgages are Fannie, Freddie and FHA, and he should really check that out. If it is, then he has some options.

DUNCANYou know, Diane, in our survey of consumers, we are -- or of the public, we are curious about, what does the public think about this broadly? And so we asked them, is it wrong, or right or wrong to walk away from your mortgage even it you're underwater? And about 90 percent of people say, you're still responsible for your obligation. Among delinquent borrowers, if you ask them the same question, it falls to about 70 percent.

DUNCANBut if you then ask the public, if the household is under financial stress, they're actually more forgiving for people who have some additional financial problems than just sort of a general proposition. We thought that was interesting.

REHMHmm. Interesting. You know, going back to 2008, Doug, there are an awful lot of people who would say that Fannie and Freddie had a major role to play in the housing bubble or what led up to it. What's changed since then in terms of Fannie and Freddie's practices that would not allow this to happen again?

DUNCANWell, for one thing, almost the whole senior management team is a different team.

REHMYes.

DUNCANSecondly, we're under conservatorship, and so our goals and objectives have changed substantially to -- away from the more political perspective to providing liquidity for the market, keeping it functioning in an environment where the rest of the sector really is not participating a lot, trying to work with troubled borrowers, focused on helping -- keep people who are willing and able in their homes and trying to improve processes to help build an infrastructure that will work better for the future. So it's really a different company today than it was.

REHMOf course, you still got people who want to do away completely with Fannie and Freddie. What do you see in your own future?

DUNCANWell...

DUNCAN...that's -- I was recently introduced at a speaking engagement as the extinguished economist from Fannie Mae.

DUNCANHopefully, that's not what I see. You know, I don't know what the political process will ultimately do with the structure of the market. But I think there's an agreement that something similar to some of the basic functions that the two GSEs provide will have to exist to -- for people to have access broadly to mortgage credit.

REHMDean Baker.

ZANDIDiane, can I put my three cents in there, in the question?

REHMSure. Go ahead.

ZANDIYeah. Well, first, let me say -- and maybe Doug doesn't feel comfortable saying it. But I don't think Fannie Mae -- there's plenty of blame to go around for all the bad mortgages that were made. And Fannie and Freddie had their part, but it was a minor part. The major player really was the private mortgage market. That's where most of the subprime, exotic, Alternative-A, option ARM loans that ultimately failed, and are still failing, came from. It's not really Fannie and Freddie, I think, that are at the heart of the problem.

REHMWhy are they getting so much of the blame then? Is that political?

BAKERThat is political, and that was exactly the point I had wanted to make. And, you know, it's very clear, and this was clear at the time. I was saying this. I don't know if Mark was saying the same thing, that, you know, Fannie and Freddie bear a big role. I mean, they bear a big chunk of the market. But when you look at the worst loan, these crazy subprime loans, liar loans, those were not Fannie and Freddie. Fannie and Freddie wouldn't touch those. That was the whole point. They were nonconforming mortgages. So they're not the big villains here.

REHMDean Baker of the Center for Economic and Policy Research, and you're listening to "The Diane Rehm Show." We're going to open the phones, 800-433-8850, first to McLean, Va. Good morning, Cathy.

CATHYHi. Thank you for taking my call.

REHMSurely.

CATHYI have a question about a Fannie Mae policy, which says -- I don't know if it's a recent policy, but, anyway, it says that if you live in a condominium complex that has fewer than 10 units -- my particular complex has eight -- and if 10 percent or more of those units are owned by a single entity, you are automatically disqualified from refinancing loans, whatever. And that means that nobody can buy in unless they come with a cash offer, and it means I can't refinance. And I'm wondering if your panel sees any change in that policy at some point.

REHMDoug Duncan.

DUNCANYeah. Condominiums have been a very tough issue in this environment, in part, because of the HOA fees and the -- if the vacancy rates in some of the development fall below a certain level, it's not even -- there's not the financial wherewithal to sustain the property. That's not so much the case in a smaller condominium, such as you're suggesting. I think I would be interested if, off the show, you could send some details on that, and we could follow up and see if there are any circumstances there that merit special consideration.

REHMSend directly to your office.

DUNCANSure. We'll direct them to the right person.

REHMOK. That's great. Thanks, Cathy, for your call. Let's go to Cleveland, Ohio. Good morning, Leslie.

LESLIEHi. Thanks for taking my call.

REHMOf course.

LESLIEMy issue has been like other people's. I've been trying to buy a home in the last six months, and I just cannot believe the level of difficulty attaining any kind of financing. Right now, I'm really concerned that this is becoming a nation of renters. I constantly see headlines and announcements about huge investment firms buying up huge blocks of distressed properties for renting. And I'm watching homes that I would like to purchase go to all-cash offers that I cannot compete with and seeing them put the house back on the market at basically 200 percent profit within six months.

LESLIEAnd while your previous caller was from Cleveland, the area where I'm looking at are more suburban areas. And, believe it or not, the housing market here is really quite strong in certain suburbs, and I just am very frustrated because I don't want to be a renter. I want to be a homeowner. I have more than 20 percent down. I have zero debt-to-equity. I have a job. And yet every time I try to apply, they come up with some reason to decline me and...

REHMNow, that's fascinating. What do you think could be at work, Mark Zandi?

ZANDIWell, can I ask, are you -- want to be an investor in the property? Is that it? You're not...

LESLIENo. No. No. I'm trying to buy a home for myself.

ZANDIOK.

LESLIEAnd I've just been looking at properties that need updating, some repairs, you know, that most people don't want to move right into. So basically I'm competing with investors at the properties I'm looking at. They walk in with all-cash offers, and I can't compete. And I cannot get approved for a loan in a timely manner that I can put an offer in on a property.

ZANDII see. I see. And you would qualify for Fannie, Freddie or FHA loan? The size of the mortgage is small enough that you would qualify for those loans?

LESLIEYou would think so. I'm looking at very small mortgage because I have more than 20 percent down. I'm one of the rare people who never had any revolving credit card debt. I owned a home for 12 years, from 1997 to 2010. Because I sold my home in 2010 and do not have any revolving credit right now, I do not have a credit score.

REHMDean Baker.

BAKERYeah. There's oddities there. And, you know, these are regional differences, and, you know, I can't speak to specific circumstances. It clearly doesn't sound -- it sounds like something is not right. Now, some of that could have to do -- if you're looking to fix up a home, they might -- the appraisal may be in question. But I could say I've seen the opposite. I have a friend who's house hunting here in D.C., and he's looking at condos. And this realtor at one place was telling him that they could arrange for 100-plus percent financing. So it's like the bubble years are back.

REHMDean Baker, Doug Duncan, Mark Zandi. We'll take a short break. More of your calls when we come back.

REHMAnd welcome back. We're talking about the housing market and what's happening. It seems to be picking up however slowly, but nevertheless positive signs out there. Now, here's this question of moral hazard. "If the value of my house is further dragged down because my neighbors all get principal reduction, creating lower comparable values on future sales but I don't, I'll walk away guilt free. We should have principal reduction for everybody or nobody." What do you think about that, Mark Zandi?

ZANDIWell, I don't think that's quite right. I mean, what you're doing by giving some homeowners help through principal reduction is it make -- is that you're making it much less likely that they're going to default on their loan and have that home sold in foreclosure, which would depress everyone's house price, including your own. So by helping that person stay in their home, you're actually helping your house prices, and that will lift your equity and make it more likely that you want to stay in that home 'cause it makes financial sense.

ZANDISo it's just the opposite. The question of moral hazard is that, you know, if some people are getting a principal reduction and they're getting it under certain rules and you figure out what those rules are and you take advantage of it and say -- you raise your hand and say, I want that principal reduction, too, by, say, going to a default, then you create more problems.

ZANDIAnd that, in fact, is what Mr. De Marco, the conservator of FHA -- of Fannie Mae and Freddie Mac gave as a reason why he didn't want -- one of the reasons why he didn't want Fannie and Freddie to engage in principal reduction, that kind of a risk. I think that risk can be mitigated, and lots of banks are doing principal reductions and have figured out ways to do this so that you don't have that kind of a problem. But, nonetheless, that's an issue.

ZANDIBut in -- but, you know, with regard to this email, helping people stay in their homes is good for you because it means that there will be fewer foreclosure and short sales, fewer distress sales, and that will help to support your house price, not depress it.

REHMDean Baker.

BAKERYeah, I was just going to say one way you could mitigate the moral hazard problem is if you just do it across the board. So one of the proposals was on the table is you knock down everyone's mortgage debt to 115 percent value, so, you know, there's nothing about moral hazard there. Either you're above that or below that, as if some past state, by the way, so you don't somehow find some way to lower the value of your home.

REHMDoug?

DUNCANIn our surveys of consumers, we do ask them, if you know of someone who has walked away from their mortgage, does that change the likelihood you've seriously considered it? And there is a substantial response to that.

REHMInteresting. Here's an email from -- this is from Trent, who said, "Please address the status of underwater house owners, those being foreclosed upon against the backdrop of the alleged collusion by the banks to manipulate LIBOR." Dean Baker.

BAKERWell, I'm not sure there's any direct connection with the manipulation of LIBOR. I mean, it -- you know, I think what this basically does is just one more thing that undermines confidence in the financial sector because, basically, you know, this is a hugely important rate. For people who aren't familiar -- most people probably are at this point -- it's the rate that a huge number of adjustable rate mortgages, car loans, any number of other loans in the economy, as well as a lot of derivative instruments are tied to.

BAKERAnd it turns out we weren't getting an honest reading on it. So that has to undermine confidence in the financial sector if that's still possible at this point, but, you know, I don't see a direct connection between that and foreclosures.

REHMAll right. To Nan in Orlando, Fla. Good morning, Nan.

NANHi. How are you?

REHMI'm fine.

NANI'd like to say thank you for addressing this issue. I'm very distressed to hear straw men and red herrings being addressed like massive principal reduction, which is on no one's agenda and was never proposed. What we wanted was the banks to adhere to what was agreed to years ago, offer prevailing rates, prevailing mortgage interest rates to people who were stuck in boom-era interest rates, which would significantly lower our payments and allow us to stay. It's no freebie. It's no gotcha for taxpayers.

NANThere were no teeth in this, and banks quickly ignored it. They kept their bailouts, and now they're seizing our homes. Here in Florida, 10 percent or more of our mortgaged homes are in foreclosure, including mine. I was served on June 12.

REHMWow. Mark Zandi.

ZANDIWell, you make a really good point. I think the best way to help homeowners now is to allow them to take advantage of these incredibly low mortgage rates. So, as we were discussing earlier, mortgage rates for a prime borrower, a really good borrower is -- are now closing in on 3 percent, so that's a 30-year mortgage. That's just an incredibly low number. And over half the mortgages that are out there have mortgage rates that are over 5 percent.

ZANDISo these are homeowners that could take good advantage of these lower rates, lower their monthly payments, makes it much easier for them to stay in their home and avoid foreclosure. And there are policy efforts to help that. We've talked about the HARP Program for Fannie and Freddie. There is -- FHA is also -- has a streamline refinancing program to help these kinds of homeowners get into these lower rates. And there are other proposals that are being made in Congress.

ZANDISen. Merkley, for example, has recently put forward a proposal to allow for significantly more refinancing, not only for Fannie and Freddie and FHA borrowers but for folks that don't have those kinds of loans. So I agree with the caller. That is precisely the best way, I think, at this point to help homeowners stay in their homes, and I think we should do everything we can to take advantage of these incredibly low rates.

REHMHere's an email from a bankruptcy attorney in Michigan, who says he's disappointed with the panel discussion today because -- he says, "The reality is that the banks, Fannie, FHA really don't work with anyone. The numbers of people they actually help, according to their numbers, are somewhere around 10 percent of applicants." And he says, "The statement by the head of Fannie that they will not adjust principal just shows that they, like Congress and the private banks, are really not interested in solving this problem." Doug Duncan.

DUNCANWell, I think, certainly, you know, they reference Mr. DeMarco's comments, but I would suggest that over the course of the crisis, the number of people who have gotten refinances or modifications through either Fannie's own programs or through the governmentally related programs like HARP and HAMP are a number in the millions. And there are about 50 million mortgaged homeowners out there.

DUNCANSo I'd say that the percentage number that was cited is probably not accurate. They're -- we actually -- I think, you know, our quarterly public releases detail the number of people in the different categories that we have held.

REHMWhat would the percentage more accurately be?

DUNCANYou know, I'd have to look at the percentage but...

REHMYou think it's higher than 10 percent, Dean Baker?

DUNCANOh, it's higher, definitely.

BAKERWell, I think 10 might refer to the modification through HAMP if you hadn't refinanced it.

DUNCANYeah. If it was just HAMP, that's probably true.

BAKERBut I think, you know, the point -- at least I would make the point that I think this has been a secondary priority for the government. The government -- the priority had always been get the financial sector, get the banks up and running, and basically largely leave them intact which, you know, I and many others aren't very happy about. And mortgage holders really were secondary consideration.

BAKERAnd every time there was a chance to do something big -- I know when the TARP was being debated, there were many members of Congress that wanted to have bankruptcy cram down so that a mortgage -- the conditions on a mortgage could be reset by a bankruptcy judge, which might have allowed a lot of people to go into bankruptcy and keep their homes. As it is now, the bankruptcy judge -- the mortgage loans are unique that way. They cannot rewrite the terms on that. Congress didn't go for that. Later, there were efforts to bring that in.

BAKERPresident Obama said he would support it. He didn't seem to do anything for it. So when -- there had been possibilities that could have provide sort of large-scale relief to homeowners. I've been pushing right to rent. Let people stay in their house as renters for a number of years. That had lot of support among conservatives, but, you know, again, these things never happened. So we have seen sort of trickles of assistance that's good, but you still see the bulk of the people who are underwater are still suffering.

REHMHere's an email from Jason, who says, "I've spent most of the summer trying to refinance our home and attempt to take advantage of the HARP program. Our loan servicing company, Green Tree, does not write new loans, and no other lender will deal with us because our loan-to-value ratio is 147 percent. In our experience, the HARP program is not effective. Two questions for your guests: Is there any data on the effectiveness of the HARP program? And, second, how can I find a lender who will deal with this?" Mark Zandi.

ZANDIWell, a great question. Currently, there are approximately 1.3, 1.4 million homeowners that have gotten HARP refinancing since the program began when that hit -- it was first implemented beginning late 2009, early 2010. The program has been ramping up more recently. There's been some changes to the program to make it easier to get a refinancing. Fannie and Freddie made some changes as well.

ZANDIAnd then you combine that with now very low rates. We are getting a lot of refinancing through the HARP program, so I'm very optimistic that we're going to get many more over the course of the next six to 12 months.

REHMMany more lenders, you mean?

ZANDIWell, many more HARP refinancings, but your...

DUNCANYeah.

REHMBut where are you going to find the lenders to do that?

DUNCANWell, in the first half of this year, about 500,000 HARP refinances were done. That's as much as in all of last year. So the lenders are actually acting on that. It's just, as Mark referenced earlier, there are some capacity constraints because of the demand for those refinances. And in the last two months, we've seen a big pick up in -- through -- put on HARP'S...

REHMSo what would you...

ZANDIBut, Diane, can I say...

REHMSure.

ZANDI...this fellow does have a problem that is one of the major constraints on the HARP and HAMP. And that is, if he has a loan from a smaller lender that isn't one of the big guys, it's a lot more difficult to get these loans refinanced. So what I would suggest for him to do is, you know, there are -- like HOPE for Homeowners, it's a consortium of mortgage lenders and counseling companies and other mortgage -- interested mortgage organizations. They have a website.

ZANDII would go there, and I would call them. And I would tell them my predicament. And there is a reasonable possibility that they might be able to help him find the one.

REHMAll right. We'll make sure to put that Hope for Homeowners on our own website, drshow.org. Let's go now to Clinton, N.J. Good morning, Liz. You're on the air.

LIZHi, Diane. Thank you for taking my call.

REHMYou're welcome.

LIZI just wanted to kind of comment on what was brought up earlier in the program about how it seems to be difficult for people to obtain a mortgage, whether it is for a purchase or a refinance. I work for a lender. It's a small community bank. I've been with them for three years, and I've really been doing funding for just about three years also. I don't have much more experience, so I don't really see -- you know, I know everyone says that it's so much harder now to qualify, but I don't, you know, I don't know anything else.

LIZSo for me, I just feel that, you know, we have a lot of programs out there for people who -- and not FHA. We have conventional lending programs that will allow borrowers to put down as little as 3.5 percent. You can have a 680 credit score, which is not a -- I mean, it's not great. It's fair. But, you know, you can put down that small of a down payment and still qualify for a mortgage and at a reasonable rate, too, not at an astronomically higher rate than what's the going rates are.

LIZSo I just wanted to say, I guess, my main point is that I get frustrated when I hear, you know, throughout the media and the press saying, oh, you know, I just feel like they're misleading the public a little bit in saying that it's so hard to get a loan when I really -- I don't feel like that's true. I feel like there is a lot of help out there. We also do HARP lending, and we've done several HARP loans.

REHMWell, Liz, I'm certainly glad to hear that. I think what you've heard this morning is not so much from the media as it is from the people themselves who called in and shared their own experiences. And you're listening to "The Diane Rehm Show." Dean Baker, how important is the housing sector to the overall economic recovery of this country?

BAKERWell, the housing sector did drive the economy through the last upturn. So we had the recession back in 2001. It was really the boom, the bubble that drove the economy up through 2007 when it finally collapsed. Now, I don't see the housing market driving the economy again. So what I expect is that we will see some continued growth in prices, some uptake in construction and that has been a positive for the economy over the last three quarters.

BAKERAnd I expect that to continue. But anyone who thinks the housing sector is going to play the same role in the economy as it did before 2007, I think, is badly mistaken.

REHMAnd, Mark Zandi, we're facing with this Congress, what's been called a fiscal cliff, something that could derail any positive trends in the housing sector. What do you think is likely to happen there?

ZANDIWell, I think Congress and the administration, you know, after the election, the next Congress, the next president will come together, and they will address the fiscal cliff issue at least to the degree that it won't undermine the economy or the housing market recovery. You know, they've got a lot of work to do, but I think, ultimately, given the politics of this and the economics of this, they're going to reasonably and gracefully address that, and the housing recovery will remain intact.

ZANDIAnd, you know, I do think housing has a bright future. And I think a year -- certainly, two years down the road, housing is going to be adding significantly to our economy's growth and adding a lot of jobs, by the way, a lot of construction, manufacturing, transportation, distribution. So I'm counting on housing to come back. I think the fundamentals are in place for a good, solid recovery...

REHMAll right.

BAKER...and I'm confident that it will be.

REHMDean Baker, some people are saying, fine, let it go over the cliff.

BAKERWell, I think it'd be crazy to see as the economy -- well, let me put this way. To be entirely accurate, it's not exactly a cliff. So just to be clear what goes on here is that we would -- if Congress and the president can agree on anything, we'd be paying somewhat higher taxes in 2000 -- January 2013, which he cuts in spending. That's a drag on the economy. If we don't do anything Jan. 1, it's not a big deal. If we don't do anything Feb. 1, it's still not a big deal.

BAKERIf we don't do anything all year, it will be a big deal. But the point is, we don't have sort of this drop-dead date. So it'd be best if we had something resolved even before the New Year. But even if we run until next year, we're not falling off a cliff.

REHMWhat do you expect to happen? Mark Zandi says, perhaps right after the election.

BAKERI'd expect probably after the election, we'll get something, at least part of the -- they could do this in phases. So we'd have some things worked out and probably the full thing worked out in January, February with the new Congress.

REHMDean Baker of the Center for Economic and Policy Research, Doug Duncan, chief economist for Fannie Mae, Mark Zandi, chief economy of Moody's Analytics, thank you all so much.

BAKERThanks for having us.

ZANDIThanks, Diane.

REHMAnd thanks for listening. I'm Diane Rehm.

ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Megan Merritt, Lisa Dunn and Rebecca Kaufman. The engineer is Tobey Schreiner. Natalie Yuravlivker answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our email address is drshow@wamu.org, and we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.