US housing rescue Bill not a cure-all for market ills

July 25, 2008
US housing rescue Bill not a cure-all for market ills
It will prop up lenders and curb downturn but won't help many first-
time homebuyers

NEW YORK - A SWEEPING housing rescue plan passed by the US House of
Representatives could help ease the downward spiral in the property
market but it is no magic bullet, analysts said.

The plan, which offers aid to 400,000 homeowners facing foreclosure
and seeks to support struggling mortgage finance giants Fannie Mae
and Freddie Mac, cleared a major hurdle before the House vote on
Wednesday when the White House dropped its threat to veto the plan,
despite some reservations.

The US Senate is expected to clear the Bill this week.

Still, economists caution against getting too optimistic over the
legislation. The housing market has been in a steep slide for nearly
three years, during which time a glut of homes for sale has swelled,
ruling out any hope for quick fixes.

While the Bill was widely praised, doubts remained about how much
real-world impact it will have for consumers.

'It may staunch some of the downturn, but it's going to have a very
modest positive impact,' said Mr Mark Zandi, chief economist at
Moody's Economy.com.

Highlights of the Bill include: US$300 billion (S$408 billion) to
provide more affordable mortgages to troubled homeowners, nearly US$4
billion in grants to help communities fix up foreclosed properties
and a US$7,500 tax credit for first-time homebuyers.

But many first-time buyers will not get help.

The tax break applies only to homeowners who purchase properties
between April 9 this year and July 1 next year.

The full amount of the credit also is only available to individuals
with incomes under US$75,000 or couples earning less than US$150,000.

Moreover, it will have to be paid back, interest-free, over 15 years.

Cash-strapped homeowners, who are spending more than 31 per cent of
their income on their house payment, may qualify for a new, more
affordable loan under the Bill.

Lenders, however, would have to agree to take a loss on the existing
loans, and would walk away with at least some payoff and avoid the
costly foreclosure process. Lender participation is also voluntary.

US Treasury Secretary Henry Paulson said on Wednesday that agreement
on the sweeping housing rescue Bill would send a strong message to
investors around the world and will be key to helping the United
States turn the corner on the housing crisis.

He said that he had urged President George W. Bush to drop his veto
threat because of the important elements in the Bill that would
provide support to Fannie Mae and Freddie Mac.

The pair either hold or guarantee mortgages worth US$5.2 trillion
which account for half of the total US mortgage market.

The Bill gives beleaguered Fannie Mae and Freddie Mac access to an
expanded credit line from the US Treasury. It also authorises the
Treasury to purchase equity in the two companies if necessary.

'Anything that stabilises the financial system at this juncture is
probably a contributor to better outcomes on growth,' said Mr Neal
Soss, chief economist at Credit Suisse.

'What the government does is help to draw a line in the sand and say
we're not going to allow a major collapse here akin to what we saw in
the Great Depression,' said Mr Brian Levitt, economist at
OppenheimerFunds.