Bailout may give housing market some breathing room
The rescue plan for the banking system doesn't directly address the slide in property values, but it could set the stage for recovery.
The government's $700-billion plan to bail out the banking system may calm panicked financial markets, but its real value may be in buying time to address the root problem: the continuing slide in housing values.
The Treasury Department's rescue plan is far from a done deal, with Democrats saying Sunday that they would push for more relief measures aimed at homeowners facing foreclosure and for stricter oversight of the program that would allow the government to buy up billions of dollars of securities tied to troubled mortgages.
But there was broad agreement that the government must move quickly, decisively and comprehensively to get the global financial system moving again.
"What's been lacking is strategic oversight, as opposed to swatting one fly and finding 10 others," said William R. Gruver, a professor of management at Bucknell University and a former partner at Goldman Sachs & Co., after the broad outlines of the plan were released late last week. "We have to get to the underlying housing issue: If people were still making their mortgage payments, we wouldn't be here talking about these other problems."
The rescue plan does nothing in itself to shore up the housing market. Rising defaults and foreclosures on home loans, spurred partially by declines in home values, are the cause of the collapse in price and tradeability of the mortgage-backed securities on the books of banks and investors.
But without government action to aid battered banks, financial experts say, mortgages would remain difficult to get and the housing market's recovery would be further delayed. The most recent sales figures for Southern California show that median prices were down 34% last month compared with a year earlier. About half the homes sold were foreclosures.
"The nub of the problem is mortgage-backed securities that people have a hard time valuing, and [the rescue plan] doesn't address that," said James R. Lothian, a professor of finance at Fordham University and a former executive at Citicorp. "But the basic thing that needs to be done is to provide liquidity to the banking system and markets so we don't have bank runs going on."
The need for a federal bailout was underscored after private solutions to the crisis fell by the wayside -- notably last week, when Wall Street banks failed to assemble a rescue plan for insurance giant American International Group Inc. and Lehman Bros. Holdings Inc.
