For $700 Billion, The Little Guy With A House Gets Nada

Congress has built all kinds of protections into the $700 billion bailout to keep the average citizen from having to foot the bill. If assets sold to the Treasury by financial companies have not regained their value in five years, the firms must pay the government back. That only works if the banks are still in business.

There will be oversight of the program so that Treasury cannot draw down the entire $700 billion all at once and use the money for a vacation in Mexico.

The package of salvation has been named the "Emergency Economic Stabilization Act of 2008." It may stabilize some big banks and a portion of the credit markets and may or may not cost taxpayers money over time. It almost certainly gives the troubled homeowner nothing.

"This isn’t about a bailout of Wall Street, it’s a buy-in so we can turn our economy around," House Speaker Nancy Pelosi, D-Calif., said in a statement. That would mean that housing prices and employment would be resurrected. While it may be lost on some politicians that home prices may fall another 20%, it is not lost on homeowners.

Buried deep in the bowels of the bill are vague clauses about helping mortgage-holders with their burdens. Since Treasury will own some mortgages which it buys from banks, it could, in theory, set up programs to improve mortgage payment terms or interest rates. In almost all cases, it is not that simple.

According to The Wall Street Journal, "If the government buys entire loans, it will have more control of terms for homeowners than if it buys pieces of mortgage-backed securities." The essence of mortgage-backed paper is that pools of home loan are cut into pieces and combined with pieces from other pools. That was supposed to spread risk across an asset base built by mathematical models to keep capital safe. It also pulled asunder mortgages normally held by a single bank and spread them around the system. Finding mortgages home-by-home will be remarkably difficult.

Mortgage-holders might have supposed that some part of the $700 billion would go for aid based on need. They have supposed wrong, and that means that the "Emergency Economic Stabilization Act of 2008" has missed the bull’s-eye of the trouble. Until the drop in the value of housing is addressed, complex paper based on its value cannot recover. That will tend to further undermine the delicate peace the Treasury is trying to broker between banks and their worst assets.

The housing market problem remains unaddressed.. The bailout is vexed at its beginning.

Douglas A. McIntyre