Local Housing and Business Experts See Bailout as Way to Stabilize Economy

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by Lesley R. Chinn

While local business and housing experts welcome the recent bailout of two of the nations largest finance lenders, some homebuyers should benefit as result of the measure.

In what could be the largest financial bailout in U.S. history, on Sunday, the U.S. government seized control of Fannie Mae and Freddie Mac, two quasipublic mortgage companies which own or guarantee almost half of the countrys $12 trillion in outstanding home mortgage debt.

The new developments affected both companies from the top down, as key executives were ousted and shareholders claims were impacted by the process. The two companies, publicly traded, but also serving

a government mission to support housing, were put in a conservatorship, a process which will affect common shareholders, whose will come last.

Mark Ferguson, a spokesman for the U.S. Small Business Administrations Chicago office, said the bailout could be seen as stabilizing the economy and preventing a recession. The government can step in with

innovative programs to help people who may be facing foreclosure or hard times to keep them in their homes. If that happens and hopefully folks have not been laid off, perhaps theyll have the dollars to spend with small businesses.

The U.S. Treasurys decision removed a huge, dark cloud and had a rippling effect on world markets. Japans benchmark Nikkei 225 index surged from 3.4 percent to 12,624.46, while Hong Kongs Hang Seng index

advanced 4.3 percent to 20,794.27. Seouls Kospi rose 5.2 percent. In morning trading in Europe, Britains FTSE 100 was up 3.7 percent, Germanys DAX climbed 3.4 percent and Frances CAC 40 was up 4.6 percent. The Dow also went up. The Dow is a strengthening dollar and that means that people are starting to take a different look at this, Ferguson added.

Fannie Mae and Freddie Mac have reported nearly $14 billion in losses since the housing market bubble burst. In contrast to many other financial institutions, Fannie Mae and Freddie Mac have never been required

to hold much capital relative to their assets. That has left both companies with a smaller cushion for absorbing losses. A lackof capital also indicates they are unable to buy mortgages from lenders.

The presence of the two companies in a struggling housing market is critical since they help keep mortgage rates low for many consumers. Both companies had been struggling to balance growth through buying loans against rising delinquencies. The companies debt instruments, which have a high credit rating, are widely held by banks and institutional investors around the world. A crisis in confidence could not only damage the companies, but also increase the cost of borrowing for the U.S. government.

Michael van Zalingen, director of homeownership services for the Neighborhood Housing Services, explained that this is just a temporary step for homebuyers and homeowners. This will do nothing for homeowners who are facing foreclosure. It was designed to prop up Fannie Mae and Freddie Mac to keep them afloat and a secondary market alive for refinanced and purchase loans, he explained.

Had Freddie Mac and Fannie Mae gone under, Zalingen said it would have reduced loan options for homebuyers and homeowners. Everyone would have had to use FHA loans to buy or refinance their properties. It pretty much would have frozen the housing market.

In the final analysis, taxpayers will foot the bill at a cost estimated in the billions. However, officials suggested it could have been worse. U.S. Treasury Secretary Henry Paulson Jr. stated that it certainly would not be as much as it would have been if these institutions were allowed to fail.

Presidential candidates Barack Obama and John McCain said the bailout was necessary. Obama said the plan for Fannie Mae and Freddie Mac needs to focus on strengthening the economy and helping struggling

homeowners rather than focusing on the whims of lobbyists and special interests.

McCain proposed eventual privatization of Fannie Mae and Freddie Mac, but credit markets must be stable and have the ability for firms to access capital again so they can scale down their portfolio holdings, he said.

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