The Treasury Department has unveiled a plan to pump billions of dollars into state housing finance agencies so they can increase loans to first-time homebuyers.
In a normal year, the so-called HFAs, or housing finance agencies, finance about $15 billion worth of mortgages, but the credit crisis has made it difficult for them to raise money for the loans.
Basically, the HFAs work like an affordable housing bank, says Steven Spears, acting executive director of the California Housing Finance Agency.
He explains that the agencies issue tax-exempt bonds to Wall Street and then the HFAs use the money to make loans. But investors have become reluctant to put their money into anything related to mortgages, especially in parts of the country, such as California, where home prices have fallen significantly since the market peak in 2006.
"They were just not interested," Spears said, explaining that his agency has been out of lending capital for a year now.
"Two years ago we had record lending, he said. "We had $1.7 billion in mortgages for first-time homebuyers. We're not making any loans at all really right now."
Treasury's plan is for the federal government to buy the bonds from HFAs, who will in turn have the money to lend to first-time homebuyers such as Natasha Henry, who is looking to buy a foreclosure in Boston's Dorchester neighborhood.
Natasha Henry, a single mom with a steady job and good credit, is the kind of first-time homebuyer that stands to benefit from the program. Henry moved back in with her parents to save for a down payment and enough money to fix up the house once she's bought it.
"I paid off all my credit cards — only held on to one, got my debt down," says Henry as she discusses her financing options with a housing counselor.
Henry is exactly the sort of person needed to turn the housing market around, analysts agree. But first, the HFAs need a shot in the arm.
"They have historically performed a critical function in serving first-time homebuyers across the country," explains Michael Barr, assistant treasury secretary for financial institutions. He says the current market has made it "very, very difficult" for the HFAs.
Barr has not said how much the federal government will spend on the housing agency bonds, but it is likely to be in the range of $15 billion to $20 billion.
But he says the government will be getting that money back.
"The expected cost to the federal government is zero. The expected cost is fully covered by the fees that HFAs are being charged for participation in the program," Barr says.
There is some risk, but most economists think the program is worthwhile.
Mark Zandi, chief economist of Moodys Economy.com says the HFAs are a small, but important part of the overall lending picture.
"At the moment, they just can't get credit liquidity and they may not survive if they can't get help," he says.
Others economists disagree. They say the programs for first-time homebuyers are already getting enough help from the federal government.