Within the next few weeks, the federal government will provide details for what Treasury Secretary Timothy Geithner calls its “comprehensive housing program,” whose components are likely to include new guidelines for mortgage-loan modifications and at least $50 billion to help stem foreclosures.

“The crisis in housing has had devastating consequences” for the U.S. economy, said Geithner, just as some builders around the country report they are starting to see signs that the severe downturn in buyer demand might be bottoming out.

During a press conference yesterday, Geithner laid out the latest phase of the government’s bailout of the banking industry, and what its criteria will be for distributing the remaining $350 billion from the Troubled Asset Relief Fund, or TARP, whose name has now been changed to the Financial Stability Fund. Geithner spoke of a new era of “transparency” and “accountability” in how the government and banks spend taxpayer money.

First reactions to the plan, though, were decidedly mixed, as critics focused on plan’s lack of specifics or scope. Ethan Harris, who heads the U.S. economics research at Barclays Capital, referred to the plan as “shock and uh” because, he told The New York Times, it doesn’t live up to the government’s buildup.

The government’s Financial Stability Plan has three main components:

• The creation of investment funds—so-called “bad banks”—to purchase and hold banks’ toxic assets. Geithner envisions a partnership of private investors and the government in these funds that would start with $500 billion in investment capital that Geithner says could rise to $1 trillion. “Our policies must be designed to mobilize, and not displace, private capital,” he said. The private sector, in fact, will determine the price of troubled and illiquid assets, which could present problems because, right now, the gap between what banks and investors think those assets are worth is still pretty wide.

• Before any bank gets a piece of the remaining TARP money, it must submit to a “stress test” to assess its debt exposure and financial stability. The government’s financial agencies—including the Federal Reserve, FDIC, and Office of Thrift Supervision—will devise the criteria for these tests. To receive new financing, banks will have to cut the executives’ compensation, as well as limit dividends and corporate acquisitions. Banks will also have to disclose how they spend this assistance (which will be posted on a new government Web site www.financialstability.com). However, The New York Times reported on Monday that Geithner convinced President Obama not to impose stricter restrictions that would have involved the government more directly in how and on what banks spend this money.

• The government is expanding its Term Asset-Backed Lending Facility by leveraging up to $1 trillion, from its current $200 billion, for consumer and small-business loans. Homeowner assistance will focus on driving down mortgage rates by continuing to purchase the mortgage-backed securities owned by Fannie Mae and Freddie Mac. The government will also commit $50 billion to prevent “avoidable” foreclosures by reducing monthly payments.

Two of the country’s leading banking groups—the American Bankers Association and the Mortgage Bankers Association—applauded Treasury’s plan. Edward Yingling, ABA’s president and CEO, called it “comprehensive, yet flexible,” and believes it will accomplish the Obama administration’s main goal “to restore confidence levels that can bring private investment back into the markets sooner rather than later.” John Courson, MBA’s president and CEO, sees the plan as “a significant step forward” in helping to stabilizing the housing and credit markets.

Jeffrey Rosenswieg, a professor with Emory University’s Goizueta Business School, went so far as to suggest that “some of this [investment] will come back to taxpayers” if the plan is executed correctly, because “if the economy grows, these banks at some point will do well again,” he said in an interview with CNN.

However, the plan still poses as many questions as answers about how the government is going to address what virtually everyone agrees are the root causes of the country’s economic downturn: falling home prices and mounting foreclosures. "This all stems from the fact that the major asset most Americans have is falling in value and they are afraid to spend money,” said Kenneth Malm, president of Craftmark Homes in McLean, Va.

Michael Calhoun, president of the Center for Responsible Lending in Durham, N.C., doesn’t believe the financial system can be stabilized “until we stop the wave of foreclosures that continues to drive down the economy and harm millions of families.” The Center is advocating that Treasury’s plan allow homeowners facing foreclosure access to the court system to seek “reasonable” adjustments on their home loans. It also wants the government to double its foreclosure assistance allocation to $100 billion.

Stan Ross, who chairs the Lusk Center for Real Estate at the University of Southern California, isn’t sure if Treasury’s plan is necessarily an improvement over what was already in place. He thinks the government will eventually end up guaranteeing at least some of the losses incurred by buyers and sellers of banks’ toxic assets. But Ross concedes that the new plan has “critical components” that address bank capitalization and consumer lending. “This frees up capital, the banks will survive, they get new capital, they make loans to companies, and the companies invest in capital improvements,” leading to more jobs created. On the foreclosure front, Ross may not be a fan of reducing a mortgage’s principal, but he does think the plan could minimize foreclosures in other ways, such as interest-rate buydowns and deferred payments.

Builder Buz Hoffman thinks the drastic times call for a more radical solution: end the crisis by addressing loan modifications and foreclosures in a straightforward way. “This lunacy of going file by file and deciding who gets [a modification] and who doesn’t—we’ll be through three recessions before they figure it out," said Hoffman, president of Lakewood Homes in Hoffman Estates, Ill.

John Caulfield is senior editor at BUILDER magazine. Senior editor Alison Rice contributed reporting to this article.

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