Bush Administration’s Next Rescue Plan: Project Lifeline

Posted by Ben

February 15, 2008

As we all know by now, this country is in a rapidly increasing downward spiral in real estate, credit and mortgage lending. About a week after Bush released the economic stimulus plan, he and six large mortgage lenders unveiled a plan to come to the rescue of a majority of foreclosing families. The question is, how will this plan work out? Will it be effective? Will it turn our economy around? (Image credit to Rick LaForce)How Bad Is It?
It seems difficult to fathom the severity of this drop in value across the board. Some refer to it as nothing but a “slump” or a “correction,” while others think of it as a “free fall” and a recession. Both have arguments have valid points. One the one hand, we can say that we have seen this sort of behavior before. It happened in the 70s as well as the 90s. In the early 2000s we saw a major rush into real estate that some say we are paying for now. The other side of this coin however is much more negative. Depending on who you talk to, we are headed straight for a recession (which is defined in macroeconomics as a decline in the nations Gross Domestic Product or negative economic growth for more that two quarters, or six month). Basically it means that we, as Americans, are not spending as much as we should be and demand dwindles, regardless of whether prices move up or down. A famous news paper columnist, Sydney J. Harris, is quoted as saying “A recession is when your neighbor loses his job; a depression is where you lose yours.” Personally, I have not noticed any reports, at the time of this writing, of an over all, wide spread loss in jobs. If you find differently, feel free to leave a comment and weigh in.

Little Help?
So what is the government’s reaction to this? Initially we saw the Federal Reserve lower the prime rate. Then they lowered it again. And again. They have continued to do this until the global markets began to take notice and start to fall. Then they cut it some more. The rate that it is at now has not been this low in a number of years. Not as low as what Alan Greenspan had in 2001, but still pretty darn low. What does this percentage rate mean? Basically it boils down to the interest rate at which one bank can borrow money from another. A lower rate means that more money is easier to borrow, but when it raises, the lending bank will make more money. Easy enough right? Right. But what does this mean for you?

What Does That Rate Mean, Anyway?
It means that the banks are getting cheaper money in order to turn around and lend it you, the home buyer. The theory behind this is that you will then go out and buy a house and that bank will make more money in the long run, if at all, since you might have kept right on renting. You will hear a good number of people saying that there are going to refinance now, since rates are lower. There are pros and cons to this that we will get into later, but for now, lets move forward with the big picture.

With this background we are better able to understand what the governments actions are attempting to do: pump life back into the country’s economy. After the rate cuts, Bush decided that best way to move more cash would be to directly inject it by putting it squarely in the wallet of the common citizen. We discuss elsewhere as to what we think you should do with it. As a side note, the tally for the amount of money being milked out was just about $150 billion dollars and there was a motion to add a another measly $40 billion so that the elderly and military vets could also participate. This barely passed at the 11th hour. How nice of them.

Beginning of the End or Just the Beginning?
Now we are the latest step in the governments’ intervention. Project Lifleline. This turns out to be a simple freeze on the time required to allow those families who are facing foreclosure, to renegotiate with their lender and get some time to get their finances in order. Those homeowners that are late by 90 days or more are the main targets of this resolution; however, homeowners in bankruptcy will not be eligible. Investment properties and vacant homes are also not included. The focus is valiantly centered on those that actually live in the troubled home. It makes more sense to save these first, as they are more able to pay, not to mention the money is much more guaranteed. Members of this program are Countrywide, JP Morgan, Washington Mutual and Wells Fargo.

There are naysayers (of course!) that believe that this is simply the beginning and this is a fruitless effort. Will the changes that these lenders are proposing be enough to put the brakes on this drop? It will be interesting to see where we can go from here. It also leads to a whole other discussion on investing. Have you taken a good look at the financial market lately? $