Continued: Bailout bill is bitter but necessary medicine

Maribel Garcia, a Minneapolis real estate agent laboring to sell houses in a tough market, is wary of the "Wall Street bailout" bill that goes before the U.S. House today for the second time this week.

"The message is: 'Let's get in trouble and then we'll get help,'" Garcia said. "Some lenders did predatory lending and [it seemed] everybody was a mortgage broker a few years ago. Now they're gone. I help people try to sell their house or avoid foreclosure or get loan forbearance every day. But a lot of people who made the wrong decisions will get off."

Garcia, who's working 12-hour days lately, echoes widespread Main Street sentiment.

But here's the problem: Unless the House passes the $700 billion rescue plan that the Senate approved Wednesday, a lot more folks on Main Street are going to lose houses and jobs.

On Tuesday, the day after the House rejected the first proposed bill, the stock market shed 778 points, losing about $1.4 trillion in market value. That's about double the price tag of the bailout package, which is designed to jump-start frozen credit markets and restore the confidence of shaken investors and lenders.

Factory owners, car dealers, small businesses and healthy consumers in the Twin Cities and around the country are complaining about wary bankers reducing lines of credit and raising rates.

"Wall Street is taking its layoffs and [financial hits] and the banks are taking hits and Main Street is about to get hit," said Chris Sebald, chief investment officer of Advantus Capital Management, the investment management unit of St. Paul's Securian Financial. "If we can get stabilization in the financial markets, the pain will be less deep for consumers."

Today, the only active secondary housing-bond market is for plain-vanilla, government-backed loans. Meanwhile, risk-averse investors have flocked to low-yielding U.S. Treasury securities.

"There's a crisis of confidence," said Greg Anderson, senior portfolio manager of mortgage-backed securities at Thrivent Financial for Lutherans. "Credit drives growth. The mortgage securities market is the largest securities market in the country. This bill is not a silver bullet. But the $700 billion will act as capital to stabilize the market and restore some confidence. There are businesses and nonprofits that need to borrow that are hurting."

One-third of small-business owners report the uncertain economy as the biggest challenge they face, the largest number in the seven-year history of the American Express semiannual survey of business owners. Cash flow concerns have risen while capital spending plans have declined to their lowest level since 2001.

This bill, improved with oversight and safeguards in recent days, doesn't bail out the big shooters behind the mortgage-securities debacle. Some got out early. Others lost fortunes amid the collapse of AIG, Fannie Mae, Freddie Mac, Lehman Brothers and Bear Stearns. Still others, including hedge fund managers caught holding billions in now-discounted mortgage paper, are going to answer to their affluent investors.

As always, many innocent financial services workers have lost jobs.

Blame can be spread across the political, financial and consumer spectrums. The Clinton administration made home ownership for low-income borrowers a priority by easing lending criteria. The Bush administration and Federal Reserve Chairman Alan Greenspan failed to deter the surge of subprime lenders and so-called "no-documentation" and "liar loan" peddlers amid the housing boom of 2002-06. And some buyers who should have gone to home-ownership class before they looked for a house bit off too much or didn't read the fine print on adjustable-rate loans they now can't service.

A key part of the Treasury rescue plan is buying the illiquid mortgage-backed securities from financial institutions at steep discounts on the dollar. Once this toxic debt is off their balance sheets, the theory goes, credit markets can return to what passes for normal. Another key part of the legislation addresses the estimated 5 million homeowners behind on mortgage payments on houses that are now worth less than their loan balances, according to syndicated housing columnist Kenneth Harney.

The new federal entity that will purchase portfolios of troubled mortgage assets is likely to adopt the bulk-approach solution advocated by the FDIC, the regulator and insurer of federally chartered banks, rather than a loan-by-loan approach.

Pushing through scheduled foreclosures en masse would be too costly for lenders and catastrophic for borrowers, according to FDIC Chairman Sheila Bair. She recommends a "systemic" approach for delinquent borrowers who fit pre-set criteria and who could automatically qualify for a rate-and-principal reduction.

That should keep tens of thousands of families in their homes and help stabilize a housing market that's been falling for two years.

Some have also suggested that the government could make money on the $700 billion outlay as housing values rise. But Sebald strikes a note of caution.

"It's not all coming back at 8 percent interest," he said. "But it's almost always better to get started, get the loan losses flushed through and get institutions lending again."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com