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Don't expect immediate upswing in housing market from bailout, warn local analysts

This article first appeared in the St. Louis Beacon: September 8, 2008 -  The slow St. Louis area housing market won't immediately get better -- or worse -- with the federal government's takeover of troubled mortgage giants Fannie Mae and Freddie Mac, but more loan money could eventually become available, say local analysts.

"In terms of a trickle-down effect, I don't think you'll see anything immediate. It will take several months for it to work its way through,'' said Robert Cropf, chairman of the Department of Public Policy Studies at St. Louis University. On the other hand, the news prompted a welcome rally on Wall Street Monday, as well as in the European and Asian financial markets.

On Sunday, Treasury Secretary Henry Paulson announced the bailout. Under its terms, the chief executives of both Fannie Mae and Freddie Mac will be replaced, and the Treasury Department promises to invest up to $100 billion in each company to tide each over. The Treasury Department will also get senior preferred stock in exchange. 

Cropf said the the government had no choice but to take steps now to stabilize the financial market, which has been brutalized by credit losses -- or face more dire consequences later. The government intervention -- perhaps the largest in the nation's history -- is incredibly complex, but Cropf said taxpayers will understand the bottom line: They will be shouldering the cost, which is as yet unknown, but could be in the billions. The takeover could also prove costly to shareholders of the two mortgage lenders, including banks, insurance companies and other large investors, should the stock be devalued.

Juli Niemann, an analyst with Smith, More and Co., a financial services firm, said the takeover clears away a cloud of uncertainty hanging over the financial markets and may encourage banks to begin lending money again, and at lower interest rates.

"And, maybe, because of lower mortgage rates, we'll have some buyers again,'' Niemann said. "If you take all of this together, you may have just put a floor under the housing industry. Of course, that is being very optimistic.''

Niemann said the action serves as a transition solution that won't stop the financial bleeding of mortgage insurers who are paying dearly for loan defaults that have crippled the industry. And, she said, a lot of anxiety remains in the financial markets because other negative economic factors -- such as job loss and rising fuel costs -- aren't going away.

"No one's out of the woods yet. This is a transition solution that simply buys time,'' she said.

St. Louis Realtor Christa Mulchek said she's hoping that "something will shake buyers out of the trees," but she doesn't expect it to happen overnight.

"As far as the phone ringing off the hook because of this announcement -- that's not going to happen,'' said Mulchek, a broker and agent with Prudential Select. "I don't think the average home buyer even understands what Fannie Mae and Freddie Mac mean.''

Mulchek said the action was needed by lenders and will ultimately help the loan market. But, she said, first-time home buyers, in particular, are not taking advantage of favorable market conditions.

"We have a large inventory of first-time buyer priced homes, but we're not even seeing lookers,'' Mulchek said.

Low home prices, a loan interest rate hovering at about 6.5 percent and a $7,500 tax credit for first-time buyers that was included in the housing assistance legislation signed by President George W. Bush in July make this a good time to buy a house, Mulchek said. But potential buyers are wary of the housing market because of all of the negative news associated with the mortgage crisis, and many are saddled with student loans, credit card debt and the rising cost of living.

Eric Madkins, director of housing and foreclosure intervention for the Urban League of Metropolitan St. Louis, hopes that the intervention stabilizes the hurting housing market.

"The devastation of the market is making it extremely difficult to make new loans, due to the current credit crunch. The faster these entities strengthen, the better for everyone -- existing homeowners, investors and new borrowers."

Mary Delach Leonard is a veteran journalist who joined the St. Louis Beacon staff in April 2008 after a 17-year career at the St. Louis Post-Dispatch, where she was a reporter and an editor in the features section. Her work has been cited for awards by the Missouri Associated Press Managing Editors, the Missouri Press Association and the Illinois Press Association. In 2010, the Bar Association of Metropolitan St. Louis honored her with a Spirit of Justice Award in recognition of her work on the housing crisis. Leonard began her newspaper career at the Belleville News-Democrat after earning a degree in mass communications from Southern Illinois University-Edwardsville, where she now serves as an adjunct faculty member. She is partial to pomeranians and Cardinals.

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