Housing Legislation a Help but No Magic Wand

NEW YORK (Reuters) – Washington’s plan to rescue the housing market may help shore up the U.S. economy as it copes with the worst slump in the housing market since the Great Depression, but don’t look for a swift recovery.

Investor confidence has been bolstered by the government’s recent proposals, driving stock price higher since last week, and economists agree the move to provide extra funding for mortgage giants Fannie Mae and Freddie Mac is vital.

One unintended consequence, however, has been rising interest rates as the bond market has sold off sharply since the plan was unveiled last week. That risks muting, at least in part, the broader benefit of supporting the two mortgage finance firms.

The U.S. House of Representatives approved the housing plan on Wednesday afternoon, with the Senate expected to vote on it later.

Policy-makers and economists see the government sponsored enterprises as crucial to keeping the housing market open for business since they own or have guaranteed almost half of the $12 trillion in U.S. mortgage debt outstanding.

Financial markets’ recent loss of confidence in the GSEs led many economists to contemplate the consequences if they were to collapse, convincing many that measures being taken by Congress were necessary.

“It’s necessary and it will have positive benefits to the U.S. economy for a period while we’re in such difficult straits,” Brian Fabbri, managing director of economic research at BNP Paribas, said about the rescue package, which has also been supported by the U.S. Treasury.

“If there is no GSE Treasury help, the housing market wouldn’t just be in recession or declining, it would plunge. We wouldn’t begin to estimate how low it might go if GSEs were not able to fulfill their mission.”