The Crisis and Your Pocketbook

By Ylan Q. Mui and Dina ElBoghdady
Washington Post Staff Writers
Tuesday, September 23, 2008

The government's complicated financial intervention has left many everyday consumers and investors curious about the impact on their pocketbook. Today, The Post is starting a feature that attempts to answer some timely personal finance questions.

Q. How will the government's plan affect my money-market fund?

A. Last week, the U.S. Treasury Department promised to insure the value of deposits in money-market mutual funds, much the same way that the Federal Deposit Insurance Corp. protects the first $100,000 in your bank account: Whatever you put in, the government now guarantees you'll get out.

However, the Treasury has since said that its umbrella is limited to deposits made before the close of business Sept. 19, the day the measure was announced. New accounts or money added to existing accounts will not be covered.

There's another catch: The guarantee is not automatic. Your money-market fund must pay a fee to participate in the program, and it's unclear which funds will join. The fee will probably be based on the amount of assets, although details are still being worked out, according to Treasury spokeswoman Jennifer Zuccarelli. The guarantee will last one year.

Money-market funds are operated by mutual fund companies. They are different from the money-market accounts offered by banks, which are federally insured and are advertised as a safe way to store money at higher interest rates than traditional savings accounts. Money-market funds are typically investments in short-term debt issued by large, stable institutions. That makes the funds low risk -- but not no risk.

Money-market funds have almost always produced positive returns. But last week, one of the nation's largest funds announced that the value of its shares had dropped 3 percent, and at least three others said they would close to limit unspecified losses to investors.

The move by the Treasury guarantees that you cannot lose money that has been deposited in a money-market fund. The Treasury has pledged as much as $50 billion to make this happen, and there is no limit to the amount that will be guaranteed in individual accounts.

Q. How will the government's bailout plan affect home buyers and sellers?

A. The goal is to enable major financial institutions to unload their troubled mortgage assets so they can more freely lend to people who want to refinance or buy homes.

A stronger flow of mortgage money should then help whittle down the oversupply of homes that has depressed housing prices, contributed to foreclosures and prolonged the housing crisis.

"This is intended to put a floor on dropping home prices, and in theory that should ultimately benefit everybody," said Guy Cecala, publisher of Inside Mortgage Finance.

The impact on mortgage rates isn't clear. Yesterday's upheaval in the financial markets reflected investors' uncertainty about the rescue plan and lifted interest rates on home loans. The rates on a 30-year, fixed-rate mortgage rose to an average of 6.26 percent yesterday after a recent daily low of 5.87 percent, said Keith Gumbinger of research firm HSH Associates. "There has been an upward march for interest rates since the news of the bailout broke," Gumbinger said. Rates dipped below the 6 percent mark in the days following the federal government's takeover of mortgage financiers Fannie Mae and Freddie Mac.

Even if the bailout plan works, its benefits won't come quickly enough for people who are now struggling to pay their home loans or those in foreclosure. There are no provisions in this plan that target them.

Congressional Democratic leaders want to change that. If the Treasury becomes the new owner of billions of dollars in mortgage-backed assets, they say it should force lenders to rewrite loans for troubled homeowners and forgive a portion of their debt.

Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) is pushing the government to come up with a "systematic approach for preventing foreclosure" on mortgages it acquires as part of this plan. Dodd also wants to resurrect a proposal that allows bankruptcy court judges to rewrite loan terms so borrowers in bankruptcy can afford to keep their homes.

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