The Key to the Solution of the Financial Problem Is To Check Foreclosures

The key to the solution of the financial problem is to check foreclosures. But the heads of the administration and the Republicans – Bush and Paulson have not woken up to this fact. They are opposing any move to draw funds from the $700 bailout package to help foreclosure victims. Hopefully things will change with the President-elect Barack Obama taking over the reins of the government with the support of the Democrats Obama has said that the foreclosure issue is pivotal in any solution that attempts to address the financial crisis.

Jack M. Guttentag is a finance professor at Wharton, Pennsylvania University. He said, “The financial sector weaknesses all originate in the housing market. If we don’t solve the housing problem, then the weaknesses in the financial sector are going to continue to multiply.”

Sheila Bair, the chairperson of FDIC agreed with this view. Speaking to the House Committee on Financial Services she said, “Minimizing foreclosures is essential to the broader effort to stabilize global financial markets and the U.S. economy.”

Another professor of Wharton, Susan M. Wachter who specializes in real estate said that it is very important to break the relentless cycle of reo homes rushing into the market and pushing down prices. This in turn triggers off more foreclosures. She said, “The housing crisis is still a major source of the broader economic crisis that we find ourselves in.”

But some other other pundits differ. Kent Smetters is a professor at Wharton (insurance and risk management). He argues that the borrowers and lenders should be allowed to pay for the consequences of the risks that have soured. Trying to dilute the consequences will not mitigate the financial wreck that has already taken place – it will just drag on the cloudy weather. He explained, “The alternative is to say we’re going to let the train wreck happen. What that does is to allow us to clear the tracks sooner.”

On 26th November this year, $800 billion was infused into the credit market by the Federal Reserve and Treasury Department. It was inclusive of $600 billion that was to be used for purchasing debts that had been issued by Fannie Mae and Freddie Mac. The measure immediately pushed down the fixed rates of 30-year mortgages from 6% to 5.5%. Immediately loan applications began to pour in from those seeking modification of mortgages or wanting to buy houses.

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