Reactions to the Fed's Subprime Solution

The effect of the Fed's proposal is more long-term, say some, and it will not do much to help improve the housing industry now.

"The ruling does nothing to help the housing and credit markets correct themselves. Realistic sellers and savvy buyers able to obtain solid financing are what will stabilize this mess," says Jay Dacey, a Plymouth, Minn., mortgage planner.

Dacey says that the politicians who back the Fed's proposal are the people who stand to gain the most from it "because they can tell their constituents they are trying." And in the end, he says that might help improve the housing situation simply because "if buyers view this as a sign the government will bail them out, they might be more likely to write [home purchase] offers."

Some consumers and some industry pundits agree that regulating the subprime market will only reduce access to credit, but Kurt Eggert, a law professor who has testified to Congress on predatory lending issues and is a past member of the Federal Reserve Board's Consumer Advisory Council, says data do not support that theory.

"We have seen that the opposite is true," says Eggert. "By establishing clear and effective rules that require effective underwriting, escrowing of tax and insurance, and requiring effective documentation of the ability to repay the loans, the Fed could increase the access of beneficial credit to borrowers and increase investor confidence in subprime loans."

Greg Womack of Womack Investment Advisers in Edmond, Okla., says he sees the Fed's move as just a bail-out that will only help very few mortgage holders. "I believe the real issue here is protecting the banks who sold the mortgages," says Womack, who points out that many of the mortgage securities in question are owned by different central banks, funds, pensions and investors all over the world. "Bond holders who aren't getting their interest will become more impatient [if mortgage defaults continue as home values continue to decline]. So, the biggest benefactor of the bail out will be the banking system."

After all, riskier lending means more bad loans are made, and lenders are thus likely to lose more money. Even without regulation, this might lead lenders to be more careful in the future, Webber predicts. "But if lenders get too cautious, they lose out on potential profits and become more liberal in their lending. A balance is struck, but it's a balance driven by real people making real-world decisions, not by the government's guesses about what the "right" result is."

"Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," Federal Reserve Chairman Ben Bernanke said in a press release. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated."