US gov't tries to contain mortgage crisis
Updated: 2007-12-24 12:15
Washington - After a slow and stumbling start, official Washington is scrambling to try to prevent the unfolding mortgage crisis from pushing the country into recession during an election year. There is a strong feeling, though, that the government will need to do more to avert a financial disaster.
 US President Bush shakes hands with Senator Debbie Stabenow (L) after signing the Mortgage Forgiveness Debt Relief Act of 2007, December 20, 2007, in the Roosevelt Room of the White House in Washington. [Agencies]
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One former Treasury secretary advocates temporary tax cuts and emergency spending on the order of US$50 billion to US$75 billion. Such action could help the US from slipping into what Lawrence Summers, who served under President Clinton, fears could become the worst downturn since the steep 1981-82 recession.
Some Republicans are worried, too.
From both Martin Feldstein, who was President Reagan's top economic adviser, and former Federal Reserve Chairman Alan Greenspan have come calls for deeper government intervention to deal with the threat.
Before it is all over, the government may have to resort to measures last used in the savings and loan crisis of the 1990s. Back then, it was a new agency to take over failing thrifts sunk by bad loans. Today, it could mean a government agency to buy up billions of dollars of mortgage-backed securities that investors are shunning.
The Bush administration thus far has opted for less dramatic measures. In fact, the administration came reluctantly to the biggest step taken to date - the "teaser freezer" announced two weeks ago.
A deal with the mortgage industry will freeze the low introductory "teaser" rates for five years on some subprime mortgages - loans to people with spotty credit histories. The rates were to climb much higher, making the mortgages unaffordable for many people and putting their homes at risk of foreclosure.
The hope is that this agreement will buy time for the housing market to rebound. That would make it easier for these homeowners to refinance to more affordable fixed-rate loans.
But estimates are that only about 250,000 people will end up getting a rate freeze - a fraction of the 3.5 million home loans that could go into default over the next 2 1/2 years.
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