Should Congress help borrowers?
Lawmakers are finding it difficult to mount large-scale help for homeowners.
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Many Democrats would like to mount more expansive efforts on behalf of homeowners. Sen. Charles Schumer (D) of New York raised the matter pointedly last Thursday in a hearing focused on the near-collapse of investment house Bear Stearns. The Fed intervened with a $30 billion loan, with the knowledge and support of the Treasury Department.Skip to next paragraph
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"Everyone agrees that Bear Stearns was staring into the abyss. What about homeowners who are also staring into the abyss?" Senator Schumer asked other federal officials.
The rationale for intervening on Wall Street, he noted, was the risk to the stability of the financial system. He argued that the same can be said of American homeowners: "Thousands and thousands of foreclosures create as much systemic risk as one investment bank."
Federal Reserve Chairman Ben Bernanke responded to such concerns by putting the $30 billion into perspective. He projected that most of the loan, possibly the entire amount, will be recovered by the Fed and will cost taxpayers nothing. "If you want to say we bailed out the market in general, I guess that's true. But we felt that was necessary in the interest of the American economy," Mr. Bernanke said. Moreover, Bear Stearns shareholders did not fare well in the resulting buyout of the company by JPMorgan Chase.
It's up to Congress, not the Fed, to consider actions to stabilize the housing market, Bernanke added.
Republicans are generally wary of committing big money to a mortgage rescue. Their argument is partly that the marketplace should be the tool of choice for resolving the housing woes. Banks and borrowers can work out the foreclosure questions, and buyers and sellers can determine when home prices will stop falling. A key question is whether that process will be orderly.
Large losses of wealth?
"The risk is that we'll overcorrect," says Robert Bruner, dean of the University of Virginia's Darden school in Charlottesville. A collapse in the housing market, driven by large inventories of foreclosed homes, could impose large losses of wealth on both Wall Street and Main Street, he says.
But some downward movement of house prices is needed, many say, to bring supply and demand into balance.
Trying to prop up home prices helps lenders minimize losses but may do little to help borrowers, says Dean Baker, an economist at the Center for Economic and Policy Research, a liberal research group in Washington.
"You're not going to be doing those people a favor" with policies that reduce their loan payments, if they still can't build equity in the home, he says.