Can Washington stop home price declines?

WASHINGTON (AP) – Sept. 22, 2008 – Home prices. That’s what the Bush administration’s historic Wall Street bailout is really about.

Falling home prices in the U.S. have acted like dominoes, knocking homeowners into foreclosure and taking down lender after lender, until the entire global financial system was in jeopardy.

Experts say that the government’s enormous plan to relieve Wall Street banks of their bad investments has a decent chance of stabilizing home prices, at least in theory. If that happens, it will stop Wall Street’s bleeding, but could still keep many families locked out of the housing market.

By buying troubled mortgage debt from major banks, the government can help make more money available to borrowers – and maybe at lower interest rates. The government also will have more power to modify delinquent loans and keep homeowners out of foreclosure.

“If the government – as the mega-investor – can speak with one voice...there can be big changes in the rate of foreclosures,” said Alan White, a law professor at Valparaiso University and a longtime consumer attorney.

The downside, however, is that in many areas like California and Florida, where prices soared and are now falling precipitously, homes in many cities remain unaffordable for many families – even well-paid professionals.

For example, Paul Castor, a corporate attorney, is reluctant to buy a home for his family in San Diego at current prices.

He has a down payment of more than 20 percent and has made two offers in recent weeks, but the sellers’ asking prices “were unrealistic and I wasn’t going to budge.”

If nobody accepts his offer, Castor is more than willing to keep renting and hope home prices fall further.

“The root cause of the problem is that we don’t have any homebuyers,” said Edward Leamer, an economist at the University of California, Los Angeles. “They’re going to sit on the sidelines – by and large – until they get a better deal.”

Rather than reward Wall Street investors for making bad decisions and exposing taxpayers to hundreds of billions in losses, Leamer said the government should be providing incentives for first-time homebuyers to get into the real estate market.

Even if the government’s plans succeed, experts don’t foresee a dramatic recovery in home prices anytime soon.

“When housing rebounds, it will not do so with the kind of speed and activity that we have seen in the last couple of years when the housing market was strong,” said Bernard Baumohl, chief economist at the Economic Outlook Group in Princeton, New Jersey.

After having been burned by skyrocketing loan defaults, banks are “going to be to be very reluctant to issue any kind of risky mortgage,” he said.

Treasury Secretary Henry Paulson gave few details of the government’s plan in a news conference Friday morning, but said he would work through the weekend with leaders of Congress from both parties to flesh out the program, the biggest proposed government intervention in financial markets since the Great Depression in the 1930s.

Paulson said that the bailout would cost “hundreds of billions,” but said it would be “far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”

The Treasury secretary also said mortgage giants Fannie Mae and Freddie Mac – taken over by the government earlier this month – will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market.

Meanwhile, in Congress lawmakers were demanding specifics of the government’s financial rescue plan and pledging to work in an a bipartisan manner. “We understand the gravity of the moment,” Sen. Christopher Dodd, the chairman of the Senate Banking Committee, told reporters Friday.

Still, Democrats appeared likely to push for additional help for homeowners before sending legislation to President George W. Bush as soon as next week. “I want to make sure that Main Street (small investors) is taken care of as well as Wall Street,” said Sen. Charles Schumer.

Many questioned what the bailout package would mean for Americans in danger of losing their homes.

“Are we going to be more robust in the number of foreclosures that we’re going to stop in this process, or is this all about Wall Street and nothing about Main Street?” asked Sen. Robert Menendez, a Democrat.

Rep. Brad Miller, a Democrat who long pushed for legislation to combat abusive lending practices, said in an interview he wants to make sure legislation includes such consumer protections.

“I don’t want to come out of this with an industry that’s as crooked as the one that’s gotten us here,” he said.