By David Cho and Lyndsey Layton
Washington Post Staff Writers
Wednesday, February 27, 2008
Congressional leaders yesterday gathered support for aggressive changes to bankruptcy laws that would help troubled homeowners, even as the Bush administration threatened to veto the plan and emphasized its opposition to any program that would risk tax dollars.
Democrats are calling for the government to do more than what the administration has done to date. They propose a range of initiatives that include the purchase of troubled mortgage securities by a federal agency and the empowering of bankruptcy judges to change the terms of high-interest loans held by homeowners facing foreclosure.
But the administration said that changing mortgage terms retroactively for a select group of troubled borrowers would only add to lenders' woes and lead to higher mortgage rates for everyone.
The clash highlighted the sharp differences between Democrats and the Bush administration over how to solve the nation's worst mortgage crisis since the Great Depression.
"Homeowners at risk of foreclosure are floating 50 feet from shore, and the Bush administration has thrown them a 30-foot rope," said Sen. Richard J. Durbin (D-Ill.), the author of a proposal that would allow bankruptcy judges to change the interest rates on subprime, adjustable and other nontraditional loans for homeowners facing foreclosure.
The White House and Treasury Department officials took pains yesterday to communicate a broader message, aimed at Capitol Hill and Wall Street: The administration would oppose the use of tax dollars to rescue banks, investors and homebuyers who made foolish financial decisions. Instead, it is counting on a plan that calls for the banking industry to voluntarily work out new loans with homeowners.
"We shouldn't be bailing out banks and investors, and our focus is on the homeowners," said Robert Steel, undersecretary for domestic finance at the Treasury Department. "And some of these programs seem to be bailing out banks and investors."
That position puts the administration at odds with some of its own allies who want a more vigorous response, including congressional Republicans from states suffering severe housing downturns and some of the biggest players in the ailing financial sector.
The Mortgage Bankers Association, for example, has opposed the bankruptcy measure but hoped that the government would buy distressed mortgage securities.
Senate Democrats say there are enough Republicans willing to break ranks with the White House to allow debate on some of the proposals.
Sen. Arlen Specter (R-Pa.), whose state faces numerous foreclosures, has proposed legislation that goes beyond what the White House would tolerate. Specter wants to give bankruptcy judges the authority to roll back rates on variable-interest loans, but he is proposing a more limited plan than Durbin's.
Other leading proposals by Democrats include expanding the Federal Housing Administration's capacity to buy distressed mortgage securities from Wall Street banks at extreme discounts and appropriating $4 billion to state and local governments for the redevelopment of homes in foreclosure.
The most controversial, however, is Durbin's proposal, which would allow bankruptcy judges to cut the interest rates of housing loans to the prime rate plus a "reasonable" premium for homeowners who cannot afford their subprime mortgages or other nontraditional loans.
This would reduce payments and allow them to keep their homes after emerging from bankruptcy.
Durbin said his proposal would extend to homeowners the same kind of protections that already apply to family farms, vacation condos and yachts.
"If I go into bankruptcy, a court can renegotiate the terms on my vacation condo but is prohibited from renegotiating the terms on my home," said Durbin, whose plan is backed by labor and civil rights groups, AARP and credit unions. "It makes no sense whatsoever."
The threat of a court-ordered change in interest rates would be enough incentive to persuade lenders to voluntarily renegotiate the terms of failing loans before a homeowner is forced to declare bankruptcy, Durbin said.
But the idea is vehemently opposed by the White House.
"We look at this bill as a bailout. But worse than that, it is interfering with contracts," said Tony Fratto, White House deputy press secretary. "If you start going into those contracts and if you expose mortgages to that kind of risk, it has upward pressure on mortgage rates . . . and that's the last thing we need right now."
Home prices around the country have plummeted while the number of foreclosures has soared. One of every 10 homeowners now owes more on his home than it is worth. For many of these families, it is cheaper to walk away than to pay off the debt. Others are seeking help as they struggle with devastating increases in monthly payments on their adjustable-rate mortgages.
Charmaine Perryman, 47, came home to an eviction notice taped to her front door in Dunellen, N.J., last fall. "It was like somebody flushed the toilet, everything went out of my life," the single mother said. "I thought, 'Now we're going to be homeless.' "
Perryman had an adjustable-rate mortgage that had reset twice since 2003, rising from 7.5 percent to 11 percent. After she lost her job as a child-care provider, she could not make the $2,000 monthly payments on her $206,000 loan. Perryman was rescued by a church-based community development organization, which is buying her home from the bank. But the trauma was intense, she said.
The crisis represents a major threat to the economy and is hurting even homeowners with good credit.
Timothy MacKinnon, 32, a policy researcher from Highland Park, N.J., bought a $330,000 home last July with a conventional 30-year fixed mortgage. The value of his house has declined at least 10 percent since then.
He blames people who took loans to buy homes beyond their means and drove up real estate prices, only to default and pull home values back down.
"There's no good way to address this," he said. "I don't want to bail out bad behavior. . . . On the other hand, you can't let people lose their homes and put them on the street."
Staff writer Neil Irwin contributed to this report.