Government-Backed Mortgages Key to Economic Recovery

The housing market needs to be lifted by government-backed loans for the U.S. to successfully emerge from its economic crisis. Several good new programs are available, including attractive FHA loans. But financial troubles at Fannie Mae and Freddie Mac still haunt the markets.

Throughout the economic history of the U.S., government-backed loans have played a vital and energetic role in helping the nation recover from setbacks, such as rampant inflation, depression, and recession. After the Great Depression, for example, Fannie Mae was created to provide affordable loans to Americans. During the post-WWII era, government-backed mortgages for military veterans helped create a prosperous decade following a protracted global war that sapped the financial energy of the nation. Similarly, FHA loans, Freddie Mac mortgages, and a variety of other kinds of government-backed programs have supported us so that we could rebound from hard times. Now-if we're fortunate enough to see it happen-similar government-backed initiatives will save us from our current financial catastrophe.

Highlights of new housing bill

Many first-time homebuyers, veterans, senior citizens, and people who are delinquent on mortgage payments but otherwise have good credit will benefit from provisions in the new housing bill.

• Military personnel will be protected from rising mortgage interest rates, and from having their homes foreclosed while they're deployed.
• First time buyers, who are typically defined as those who haven't purchased a home in the past three to five years, can enjoy a tax credit of up to $7,500.
• Nearly half a million borrowers who face an imminent foreclosure will be allowed to refinance into a low-cost FHA loan.
• Fannie Mae and Freddie Mac have had their authority strengthened and extended, so that they can guarantee mortgages, including more expensive ones known as "jumbos."

Seniors also benefit from programs such as the FHA version of the reverse mortgage, which lets homeowners get paid for their accumulated equity without having to sell their homes or move.

Government-backed programs to the rescue

If government-backed programs succeed in helping Americans avoid foreclosure, refinance into more manageable loans, and buy homes that they might not otherwise be able to afford, it will be a huge boost for the economy. New buyers will begin to shrink excess inventories, and hopefully generate a fresh demand to stabilize values, or even push them higher.

The problem is that the troubles we now face are unprecedented. Fannie Mae and Freddie Mac are on the verge of insolvency, and if the government has to bail them out, it will only limit the availability of government-backed loans by diverting tax dollars. Investors, including foreigners, also have a vested interest in not complying with some of the federal initiatives that involve waiving mortgage balances to help distressed homeowners. Unless they voluntarily cooperate, some of the government-backed plans will never get off the ground. For the time being, Fannie Mae, Freddie Mac, Wall Street, and Main Street USA are all just waiting to see what happens next.