Foreclosures: Washington to the Rescue?

The Treasury is finally moving to keep people in their homes because it can't ask Congress for more bank-bailout funds without some help for homeowners

By Theo Francis

Federal agencies plan to push harder to modify mortgages for homeowners facing foreclosure. It's an incremental step that both government officials and observers called helpful, yet it's not enough to fundamentally alter the housing crisis. But the move announced Nov. 11 underscores pending changes in how government tackles not just the housing crash, but the broader financial crisis and economic stimulus efforts. After years in which attempts to help focused heavily on the private-sector institutions that dominate the global capital markets, expect a new emphasis on jobs, big employers, and ordinary consumers.

"There is a shift under way," says Timothy Canova, associate dean of Chapman University's law school in Orange, Calif. "Even people who normally would ideologically resist this course are beginning to realize the practical realities."

To be sure, the shift hasn't happened yet. The federal government remains deeply involved in the financial sector. Late on Nov. 10, the Federal Reserve welcomed American Express (AXP) to the increasingly diverse ranks of bank holding companies, giving the credit-card giant better access to federal funds from the Oct. 3 bailout package. Just hours earlier, the Fed and the Treasury Dept. eased the terms of American International Group's (AIG) aid package, boosting it to $150 billion. Life insurers may still get access to federal bailout benefits as well.

Ignoring Automakers' Cries

At the same time, the Treasury continues to resist calls to aid General Motors (GM) and other automakers, despite pressure from Congress and arguments that the giant manufacturers and their suppliers account for as many as 3 million jobs nationwide. "Somehow bankers are worthy recipients of our money, whereas auto workers and auto companies are not," says Susan Helper, an economist at Case Western Reserve University in Cleveland. "I see that as purely an ideological view."

Even those who criticize the government's focus on financial institutions say some support for the sector is crucial. The failure of AIG or a major commercial bank, for example, would likely ripple through the entire economy, Helper notes. And it's hard to predict just how, making the prospect in many ways scarier than the failure of even a giant, but more understandable, manufacturing company.

But as Barack Obama's Administration prepares to take office Jan. 20, with Democrats in Congress holding significant margins in both the Senate and the House, more aid to the automakers is likely. So are stimulus programs centering on employment—fostering a green-energy industry, for example, and infrastructure initiatives that create construction jobs (BusinessWeek.com, 11/12/08) improving roads, bridges, and schools—and putting cash into consumers' hands, such as with extended unemployment benefits.

Strings for Aid Recipients

In the financial sector, companies getting federal aid are likely to find more strings attached, something congressional Democrats have urged, arguing that banks receiving federal funds are as likely to hoard the funds as to lend them.