January 31, 2009 / 8:19 PM / 10 years ago

Obama nod to mortgage relief targets root of woes

WASHINGTON (Reuters) - President Barack Obama’s pledge to help housing with a new financial plan spotlights the root cause of the deep U.S. recession and may earn public goodwill as he balances massive bank bailouts with help for homeowners.

Obama promised on Saturday to lower mortgage costs as part of a financial rescue effort he is unveiling soon to boost the battered economy, which has been slammed by the worst financial crisis since the Great Depression, the harshest decline in growth in more than 20 years and the deepest slump in employment since 1945.

Mortgage relief could stabilize housing markets, where a glut of unsold homes has pushed down prices and curbed construction.

Perhaps just as critically for the less-than-2-week-old Obama administration, delivering aid to stressed homeowners could blunt public and political outrage over the billions of dollars the government is spending to prop up the financial services industry.

The collapse of the U.S. housing bubble is at the heart of the intensifying U.S. recession, in which a spike in mortgage foreclosures led to frozen credit markets, ultimately stalling the economy.

Prospects for a housing turnaround remain dim. Newly built U.S. single-family homes fell 14.7 percent in December, the largest monthly decline since 1994, while sales tumbled to the weakest annual pace since the government began keeping records in 1963.

By contemplating a lifeline to stressed housing markets, the Obama administration could help stem losses at U.S. banks that have been hit hard by soured mortgage assets.

FIGHTING FORECLOSURES

Policy-makers at the U.S. Federal Reserve have recently spotlighted the need to heal residential real estate markets as part of nursing the economy back to health. The No. 2 official at the Fed, Vice Chairman Donald Kohn, recently backed the idea of using government bailout funds to reduce mortgage foreclosures.

“Preventable foreclosures harm not only the affected borrowers and their communities but also, through their effects on the housing market, the broader economy and the financial system as well,” Kohn said in congressional testimony January 13.

Meanwhile, Obama’s financial rescue plan is expected to detail how the administration intends to spend the remainder of $700 billion approved by Congress to buttress distressed financial institutions, possibly by absorbing some of the tainted assets clogging financial institutions with a “bad bank” or guarantees.

Many analysts believe the administration eventually will need to ask for even more to repair the shattered financial system, with some estimates of an ultimate price tag of as high as $4 trillion, although the government may able to provide loan guarantees that would cost less.

In seeking those funds, the administration will have to mollify public outrage that Wall Street firms are getting government rescue funds even as average people are losing jobs, retirement savings and homes. Obama joined the chorus of criticism this week of executive bonuses at financial firms that have benefited from bailout funds.

At his confirmation hearing, Treasury Secretary Timothy Geithner pointed to relief for homeowners as a necessary part of the next phase of the financial rescue. The proposal would would tackle the housing crisis and involve much more direct support to credit markets so lending could resume to small business, car buyers, college students, and real estate markets, he said.

Reporting by Mark Felsenthal; Editing by Bill Trott

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