U.S. government may buy mortgages

Proposed bailout plan intended to protect economy.

By Marcie Geffner - LendingTree.com September 24, 2008

Top officials in the federal government have been working on a new plan to strengthen the country's financial system.

The plan would allow the U.S. government to buy mortgage-backed securities and other assets from banks and financial institutions. The U.S. Treasury would then be able to sell those assets or keep them as investments. The goal of the bailout plan is to protect the nation's economy.

Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke and members of Congress have been working on the plan this week. The plan needs approval from Congress and the President's signature to go forward.

The plan would be cheaper than other alternatives and would "fundamentally and comprehensively" address the root causes of the stress in the financial system, Paulson explained in a statement.

“When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs,” he said.

What the plan means for borrowers
The plan isn't designed to bolster home prices or help homeowners who can't afford their mortgage payments. Rather, it’s intended to unfreeze the financial sector, which could indirectly strengthen the housing markets over time. If that happened, homeowners would benefit.

The plan also could affect interest rates that borrowers pay on mortgages and other consumer loans, but right now it's difficult to predict what the effect on interest rates will be. The government's purchases of mortgages and other financial assets might make interest rates lower. But the government will need to borrow a lot of money to put the plan into effect, and that could push interest rates higher.

Given that uncertainty, borrowers should focus on their own personal financial situation.

As always, it’s important to:

● Educate yourself about loans and loan products.
● Figure out how much you can afford to borrow.
● Consider your own short- and long-term goals.
● Shop around for a loan that meets your needs.
● Read your loan documents before you sign them.

© 2008 LendingTree, LLC. This story, "U.S. Government May Buy Mortgages," is reprinted by the author with written permission of LendingTree, LLC.