Can The New Federal Lending Plan Stop Foreclosures?
In a new announcement that left the mortgage market dumbfounded, the Federal Reserve and the National Treasury announced that it will release another $800 billion in funds to new lending programs to get the credit market running once more and to force mortgage rates down in a bid to stop the flow of foreclosures.
This is another federal effort in the making as part of the government’s actions to put the country back on track as it reeled from the market crash brought about by subprime mortgages which triggered a wave of foreclosures across the nation.
The plan involves two major actions: the first part involving loans to address the credit crisis and the second part involving mortgages to address the foreclosures crisis. For the first part, the Treasury Department and the Federal Reserve announced that it will release $200 billion in funds to invest in securities backed by various types of loans. This includes loans for automobiles, credit cards, business loans and student loans.
For the second part of the federal program, the Federal Reserve will try to force down home mortgage rates by purchasing $600 billion in debt backed by loans guaranteed by Freddie Mac (Federal Home Loan Mortgage Corporation), Fannie Mae (Federal National Mortgage Association) and other financing institutions controlled or owned in part by the government.
However, critics and experts said that the program might not be effective in preventing foreclosures. Government Sponsored Enterprises like Fannie Mae did not guarantee high-risk loans and subprime mortgages which were blamed as the primary cause of foreclosures.
Despite what detractors are saying, these new programs exhibit an evolution in the commitment by the Federal Reserve. Usual policies to strengthen the economy are to address short-term rates, but this new federal move sees a long term investment in the mortgage markets and other areas that needs assistance. Sectors are just wishing that the foreclosures issue can also be addressed by these programs.