Will the Gamble Pay? Big Plays, Big Stakes

A federal rescue of Wall Street lenders doesn't necessarily mean taxpayers will be on the hook for losses.

November 1, 2008

The big federal rescue of Wall Street sounds like a big drain of taxpayer funds. But if housing prices cooperate, the move might actually bring money into Treasury coffers.

Under the plan, the U.S. Treasury will buy up the mortgage debt that is clogging the country’s credit markets. Getting hundreds of billions in this debt off the books of financial institutions is crucial to getting credit flowing again. Uncertainty over the value of these mortgage holdings has been a big factor in preventing banks from lending, but if the federal government buys most of this debt, financial institutions can start with a clean slate.

The clean slate should help restore lender confidence in making both conforming and jumbo loans. Secondary mortgage market companies Fannie Mae and Freddie Mac are under a directive from the federal government to buy more conforming loans.

The plan’s success depends on two factors: the discount at which the federal government buys the debt and the health of the housing market going forward. If the government buys the debt at a good discount on the market value and housing demand and prices pick up, the buyout will generate a well-deserved return on risk to taxpayers.

But if housing stays in the doldrums and the discount at which the federal government purchases the loans is minimal, taxpayers may end up footing some of the rescue bill.

Whichever way this scenario goes, the potential for an improved home mortgage market in the months ahead is good. Interest rates are expected to remain low, and Fannie and Freddie should act aggressively on their mission.

Healthy housing sales will be the driving force behind improvement to credit markets, not just here but globally. Strong home sales and stabilizing home values could turn the government’s gamble from a money drain to a big payoff.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Yun oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.3 million REALTOR® members.

Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has appeared as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website and The Hill, an “inside the beltway” publication on public affairs.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.