The federal government announced today that it would seek to stabilize the housing and financial markets, probably through an approach similar to the Resolution Trust Corp. that it established in the 1980s to deal with the savings-and-loan crisis.

Details are still unclear for the aggressive plan, but the hope is that the government would finally stop the housing and financial market freefall by clearing bad loans from the financial system by buying them and that new money would be made available for home mortgages through additional purchases of mortgage-backed securities by Fannie Mae, Freddie Mac, and the Treasury.

“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” Treasury Secretary Henry Paulson explained today in a statement. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy. … These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets, and even about the financial condition of the institutions that own them. The normal buying and selling of nearly all types of mortgage assets has become challenged.”

Treasury hopes to change that by dealing with the looming problem of securitized mortgages—primarily subprime and low-documentation loans--now worth far less than the home assets that supposedly back them. “We estimate that the losses in the U.S. commercial and investment banks from write-downs on residential mortgage assets alone would represent a hit of about 40 percent of bank capital," Brian Bethune, chief U.S. financial economist for Global lnsight in Lexington, Mass., explained in a written report today. So banks, unsure about how much or how little these home loans are worth, are cutting off the flow of money to businesses and consumers alike.

Of course, that’s not exactly news to builders, who have been mired in this ever-worsening situation for months. “Policymakers realize the root causes--falling home prices, mounting foreclosures and a frozen credit market – must be addressed now,” NAHB CEO Jerry Howard said today in a statement. “The plan being developed must get to the heart of the problem to successfully stabilize mortgage markets and home prices and restore confidence in global financial markets. Ensuring that credit-worthy home buyers, builders and other small businesses have access to credit is absolutely essential to putting this economy back on track.”

The price tag to do so is expected to be substantial. “The initial cost will be in the hundreds of billions of dollars, to be funded by the U.S. Treasury,” Bethune said. “However, the ultimate cost to the taxpayer should be much lower, presuming that the economy and the housing market recover perhaps in the second half of 2009 and 2010.”

Alison Rice is senior editor, online, at BUILDER magazine.

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