All eyes are on Wall Street to see if the recovery plan will lead to more home mortgage lending.

The federal government came to the rescue of Wall Street financial services companies in early October with the country's largest ever private-sector rescue. But will the Wall Street firms use those funds to open up bank lending to home buyers?

"That's the big question," says 2009 NAR First Vice President Ronald Phipps. "The liquidity provided by the rescue plan needs to replenish the banks' reservoirs to power housing. If it just goes into banks' capital reserves to protect against margin calls, then it won't have the intended effect."

Under the federal recovery plan, called the Emergency Economic Stabilization Act, the U.S. Treasury is authorized to spend up to $250 billion immediately to buy mortgage-backed securities and other investments that have a high potential for default. The other $450 billion is available on a restricted basis.

As investors soured on these risky investments, Wall Street firms have been able to sell the securities for only pennies on the dollar. Now, with the Treasury preparing to buy, values for the securities could firm up. Should that happen, global investors might once again be willing to purchase American mortgage-backed securities, helping to restore liquidity to credit markets.

"It's the middle-income buyers that have been squeezed," says George Wonica, vice chair of NAR's Conventional Finance and Lending Committee. "High-income households buying jumbo loans can still get financing today, although they have to pay more. Buyers willing to meet the requirements can still get FHA financing."

Built-in Protections

The $700 billion spending authorization comes with numerous safeguards. Several oversight panels have been created to supervise various aspects of the program, and a number of public disclosure requirements are in place to keep expenditures transparent. 

Among other things, the package creates an independent inspector general to monitor the Treasury's use of the funds, directs the U.S. Government Accountability Office to audit spending, and requires public disclosure of all Treasury rescue-related transactions within two days. To prevent Wall Street executives from reaping undeserved rewards from the plan, the law sets limits on the compensation of officers with participating firms.

The law also establishes an insurance fund capitalized by financial institutions to guarantee certain troubled assets that were issued and gives the government the option of taking an equity stake in participating companies. In addition, the government may charge financial services companies a fee to help taxpayers recover some of their investment if the government loses money on the securities.

Immediate Help for Home Owners

Home owners who are having trouble staying current on their mortgage get help, too. The law authorizes the government to work with mortgage servicers and struggling borrowers to modify the loan terms on the mortgages the government owns.

The new law expands the FHA homeownership program enacted in late July as part of the economic stimulus package. Under that program, borrowers facing foreclosure can refinance into FHA-backed financing if the original lender writes down the balance of the mortgage to the current market value.

Phipps says this assistance to struggling home owners is crucial if the law is going to succeed.

"We're all in this boat together," he says. "It has a serious hole in it. Once you fix the hole left by potential foreclosures, then you can spend more time righting the boat and making more seaworthy."

Community banks, which were hit hard by the federal government's Sept. 8 takeover of Fannie Mae and Freddie Mac, also get help under the plan. The law allows these banks to deduct the huge losses they sustained when the value of their equity in Fannie and Freddie evaporated in the days after the federal takeover. This provision should translate into help for small businesses, which rely heavily on community banks to fund their operations.

Not Pleasing All the People

Reaction to the federal rescue plan from the real estate community has been mixed. A commentary by NAR Chief Economist Lawrence Yun posted at REALTOR.org in the days just prior to passage of the bill generated dozens of comments, many of them supportive of the government's action. "Purchase of these ‘bad' loans at a hefty discount is a good step," one commenter said.

Other comments were critical. "There is no question that the U.S. economy needs revitalization," one commenter said. "But a mass bailout of the financial community will not create the economy we need."

On the upside, the federal government could make money on its investment once the housing market stabilizes. But success ultimately hinges on the actions of Wall Street's bankers. "There's no doubt we needed to do this," says Phipps. "But the lenders now have to step up and get back into the business of lending."  

Other Provisions of the Plan

• More insurance for savings. The FDIC and the National Credit Union Share Insurance Fund deposit insurance limits were raised from $100,000 per account to $250,000 until Dec. 31, 2009.

• Longer term tax forgiveness on mortgage debt cancellation. Qualified home owners will be able to exclude any income from the cancellation of mortgage debt through 2012.

• Better breaks for energy efficiency. The 30 percent tax break for residential and commercial solar installations was extended through 2016.

• Higher alternative minimum tax limits. The AMT limit for 2008 will be $69,950 for married taxpayers filing jointly and $46,200 for individuals.