The federal government saw the writing on this week and decided that if it does not step in to help the financial sector in the US the entire economy could come to a grinding halt and plunge the US into a depression. The solution proposed centers around the government buying up something like $700 billion worth of undesirable bundled securities made up of all kinds of mortgages that may or may not ever get paid. The basic idea is that if the banks can be relieved of this burden the whole financial system will start working again. That means loans will become easier to get again which will lead to more home buyers again which will prop up housing prices again, etc. Most experts agree that dramatic action like this is needed. The idea seems to be that the dangers associated with the US falling into an economic depression more than offset the risks of this sort of bailout.
Both the Republicans and Democrats are on board with the general idea, but the Democrats are working hard to be sure the richer don’t get richer as a result of this action. Here are a few interesting quotes from a recent Bloomberg article:
U.S. Democratic lawmakers said they would act quickly on a $700 billion rescue plan for financial companies, while demanding that the legislation limit compensation for executives of companies that will benefit. …
“I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts,” said Senator Christopher Dodd, the Democratic chairman of the Banking Committee.
Still, Democrats said they would seek changes, including limiting executive compensation and offering new help to homeowners struggling to avoid foreclosure. …
“This is not a position where I like to see the taxpayer, but it is far better than the alternative,” Paulson said on NBC’s “Meet the Press.” …
Frank said it would be a “grave mistake” not to include a executive pay provision, while Paulson called such a measure “punitive.” …
As has been the norm with these recent volatile events, there are numerous details that have yet to emerge with all of this. It is possible that the new situation will help more upside down homeowners refinance into FHA short refi loans than before. Whatever the case, things are looking brighter for homeowners in trouble than they looked just a week ago. We’ll keep you posted on new developments.