The immediate beneficiaries to the latest government bailout aren’t ordinary people struggling with money problems; they’re Fannie Mae, Freddie Mac and institutions that hold securities — investments, in other words — backed by consumer loans.
But unlike Sunday’s bailout of Citigroup Inc., this time the money is expected to flow to average people, through less expensive and more readily available consumer and automobile loans as well as new or refinanced mortgages.
Here are some questions and answers about bailouts and struggling consumers:
Question: Where’s the money going?
Answer: The government’s newest packages total $800 billion.
The Federal Reserve will pay up to $100 billion up to take over debt held by mortgage giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. The Fed also will buy $500 billion in mortgage-backed securities — pools of mortgages that are bundled together and sold to investors, and backed by government-sponsored enterprises such as Fannie and Freddie.
And the government will lend up to $200 billion to holders of investments backed by various types of consumer loans.
Q: So isn’t that money essentially going to Wall Street, rather than me?
A: Yes and no. While institutions will directly see the money rather than individuals, those institutions make up the foundation on which consumer access to credit is built.
For example, Fannie Mae and Freddie Mac buy mortgages on the secondary market — they acquire existing mortgages from lenders, so those lenders can in turn make additional loans, spreading risk and making more money available to borrowers.
That’s how it’s supposed to work. But fears about the financial system and Fannie and Freddie’s health have made mortgage rates unusually volatile. Borrowing costs haven’t sufficiently stabilized or fallen enough to entice many would-be homebuyers to take the leap and help the housing market rebound.
Tuesday’s moves are intended to put lenders on better financial footing to extend mortgages carrying lower rates, and offer them to borrowers who otherwise might seem too risky amid the credit crunch.
By purchasing some of Fannie and Freddie’s mortgage obligations, the government “could help improve their credit ratings, and then they can get mortgage rates to go down,” said Laurence Kotlikoff, an economics professor at Boston University.
Q: So, now the government is lending up to $200 billion to investors holding securities backed by consumer loans. How will this help me get a less expensive loan for a car, or college? And how might it help me get a higher limit on my credit card?
A: Banks and other institutions that provide small business loans and consumer loans issued about $240 billion in securities last year, raising cash from investors to help finance their lending.
But the market for those securities essentially ground to a halt in October. That’s left lending institutions without access to cash to make loans. They’ve responded by lowering credit card limits, tightening standards for loan approval and boosting interest rates.
The government’s infusion is designed to get more money to lenders.
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