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Saturday, 4 October 2008

Bailout 'not a panacea'

WASHINGTON - THE federal government's US$700 billion (S$1 trillion) bailout of the financial industry could help homebuilders and mortgage lenders, but is unlikely to bring fast relief to anybody trying to buy or sell a house anytime soon.

The Treasury Department's future purchases of sour mortgages and other securities from banks are designed to inject cash into the credit markets and restore confidence among shaken investors and consumers.

But that may only have a slow and gradual impact on home prices, record foreclosures and the 10-plus-month supply of unsold homes.

'What the bailout does is keeps a bunch of really bad future events from happening,' said Dr Scott Shane, an economics professor at Case Western Reserve University.

'It doesn't make ...what's going on today much better.'

Many analysts say US home prices - down 20 per cent from their peak in July 2006 - still have further to fall, and must hit bottom before demand picks up. The long-awaited bottom in prices could be a year or more away.

'This is a step...to put the grease back into the machinery,' said Mr Gerard Cassidy, an analyst with RBC Captial Markets.

'This is not the panacea.'

The US economic picture continues to worsen. The Labour Department said on Friday employers cut payrolls by 159,000 in September, the largest loss in more than five years, while unemployment remained at 6.1 per cent. The cuts included 35,000 construction jobs.

Mr Jerry Howard, chief executive of the National Association of Home Builders, praised the plan, but said lawmakers need to do more.

The bailout package 'does not address the root problem of housing prices in its totality and Congress is going to have to look at doing something to help establish a floor in the housing market,' Mr Howard said.

It remains a difficult situation for builders and mortgage lenders alike because credit remains tight.

On Friday, the national average interest rate on a 30-year mortgages was 6.2 per cent, down from 6.3 per cent on Thursday and roughly equal to last week, according to financial publisher HSH Associates.

Though the bailout is attracting most of the attention, another change in the mortgage market announced this week is likely to have a more immediate and direct impact on consumers.

Mortgage finance companies Fannie Mae and Freddie Mac are rolling back fee increases imposed to shore up their finances this year.

Unlike the bailout, which likely will take months to play out, 'it's something that directly impacts mortgage lending right now,' said Mr Guy Cecala, publisher of Inside Mortgage Finance, a trade publication in Bethesda, Maryland.

Speaking just before President George W. Bush signed the rescue bill, Treasury Secretary Henry Paulson pledged to act quickly but wouldn't say how the government would go about purchasing troubled assets.

For homeowners who are behind on their mortgages and facing foreclosure, the bailout bill offers little certainty. It directs the Treasury Department to 'maximise assistance for homeowners' and write up monthly progress reports, but says little else.

Senator Dick Durbin, the Senate's No. 2 Democrat, immediately called on the federal government to enact an aggressive loan modification plan in a letter to Secretary Paulson and other officials.

'The federal government now owns or has a controlling interest in a large percentage of the outstanding mortgages in America,' Mr Durbin wrote.

'With that control and influence comes responsibility.' -- AP

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