The housing and financial markets are in the midst of severe adjustments. House prices are falling rapidly, and they are expected to continue to fall. Mortgage foreclosures, particularly among subprime borrowers, have risen to record levels and are still rising. The financial markets are having severe difficulties adjusting to losses on mortgage-backed assets.
In response to a request from the Chairman of the Senate Budget Committee, CBO has examined the potential role of federal institutions and federal support in resolving the difficulties in the financial and housing markets. This paper updates and expands on issues raised in a January 2008 CBO paper, Options for Responding to Short-Term Economic Weakness.