U.S. moves could ease housing crisis, not end it

Analysts say that Washington has a fine line to walk.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the December 12, 2007 edition

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The federal government can't lift the housing market out of a hole, but it might be able to provide some helpful ladders.

That's increasingly the view of politicians and economists alike, even some conservatives who don't typically hanker for Washington rescue plans.

The reason: They see a housing crisis that seems to be growing in magnitude – replete with foreclosures, bank losses, and declining household wealth. It threatens to constrict normal economic growth and the flow of credit.

"I think people have walked to edge of the cliff and looked down and said, 'This doesn't look good,' " says Brian Bethune, an economist at Global Insight, a forecasting firm in Lexington, Mass.

The challenge for Washington is to walk a fine line. Veer too far toward bailouts, critics say, and the result will simply be to waste taxpayer money and postpone the housing-market correction that would restore a balance of supply and demand. But policies to reduce the number of foreclosures and slow their pace, advocates say, might help all Americans by giving the banking system breathing room to work through its losses.

"If you had a series of complementary or consistent steps, then all of those things working together would get us over the hump," Mr. Bethune says.

Here are some of the main options:

• Fund the helpers. Across the country, neighborhood groups approved by the federal Department of Housing and Urban Development offer counseling to at-risk homeowners. President Bush and many in Congress want to expand funding for them.

•Offer fast relief. One big idea is to encourage mortgage firms to freeze the interest rates of large groups of borrowers who might face foreclosure when their adjustable mortgage rates reset higher. This voluntary plan is already in the works, announced last week by President Bush.

Critics call it government meddling in the marketplace, since lenders are free to modify loans on their own if it makes sense. Treasury Secretary Henry Paulson says he brokered this deal because the industry was struggling to cope with the scale and complexity of the default problem, since loans are owned by pools of investors whose interests vary.

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