Small firms, home buyers to get a boost
More administration efforts on tap to target economic trouble spots

By David Cho
Tuesday, October 20, 2009

The Obama administration rolled out an initiative Monday to help moderate- and low-income home buyers, launching what sources familiar with the planning said will be a series of proposals aimed at healing two badly wounded areas of the economy: small business and the housing market.

In an effort to encourage homeownership, the Treasury Department announced an initiative to help ailing state and local housing finance agencies provide inexpensive mortgages to underserved borrowers.

Later this week, the administration plans to ask Congress to raise the ceiling on the amount of money companies can receive from the Small Business Administration's major lending programs, the sources said.

The Treasury is also close to finalizing a proposal to use bailout funds to help community banks lend to small businesses. But a high-level meeting Monday between Treasury and White House officials raised questions about the size and some terms of the program and may have delayed its unveiling, the sources said. The administration is also considering ways to help community-development financial institutions, which can offer credit to small businesses in low-income areas.

Smaller goals

The efforts reflect the priorities of Obama's economic brain trust and its increasing preference for moderate-size initiatives over another large stimulus program that could be criticized as a package of runaway spending.

The sources spoke on the condition of anonymity because the discussions have been private and the details remain in flux.

Officials do not know how much the initiatives will cost, but none of the programs is expected match the size of the massive government bailouts that were issued during the heat of the financial crisis.

Indeed, Treasury officials would not even say how much money they would be committing to the housing program they announced Monday. In the weeks leading up to the announcement, the officials discussed investing as much as $35 billion, according to government sources.

Under the program, the Treasury, along with mortgage financiers Fannie Mae and Freddie Mac, will buy the bonds used by housing finance agencies to fund mortgages, which can carry an interest rate that is a percentage point lower than loans made by private lenders. Called HFAs, these agencies have been strapped during the financial crisis because investors have been unwilling to buy their debt. The federal government is now attempting to play the role of the investors.

Treasury Secretary Timothy F. Geithner said the program will help stabilize the housing market. The initiative will provide hundreds of thousands of affordable mortgages and enable HFAs to rehabilitate tens of thousands of affordable rental properties, a Treasury press release said.

"This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times," Geithner said in a statement. "The housing downturn has hit these organizations too. Through this initiative, the Administration aims to help HFAs jumpstart new lending to borrowers who might not otherwise be served."

Some economists cheered the efforts to aid the housing market, which they said is critical to the economic recovery.

Mark Zandi, co-founder of Moody's, called the new Treasury program "an effort to fill the gap left by the evaporation of the subprime market."

"This is the only way to do it now because the private sector is not there," he said.

The right goals?

Others questioned the administration's goal of encouraging homeownership among low-income families. During the housing boom earlier this decade, many people bought homes that were beyond their means, these experts noted. Over the past two years, high rates of default helped trigger a crisis of confidence in the mortgage industry and broader turmoil in the credit markets.

Treasury officials said the size of the program will depend on the demand for HFA loans by borrowers. The initiative will also be available for "a short window" to get the HFAs through the turmoil in the credit markets. Officials were not specific about the length of time.

The initiative does not need congressional approval. Money for the program comes from the 2008 Housing and Economic Recovery Act, which gave the Treasury the authority to bail out Fannie Mae and Freddie Mac last year, the Treasury said.

Officials are still debating how best to use bailout funds to bolster lending for small businesses.

During Monday's meeting between Treasury and White House economic officials, some expressed worries that community banks, which tend to be the lenders of choice for small businesses, will be unwilling to accept federal aid because it could be perceived as a sign of weakness and could come with conditions, such as limits on executive pay, sources said. On the other hand, some officials argue that the government needs to step in because many community banks have begun curtailing their lending to small businesses, which tend to carry greater credit risk than their larger brethren.

Any government program would seek to strike a balance between these concerns with the ultimate aim of saving or creating jobs at small businesses across the country, the sources said.

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