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Democrats Draft Plans for Distressed Homeowners

By Lori Montgomery
Washington Post Staff Writer
Wednesday, March 19, 2008

After the collapse over the weekend of one of Wall Street's biggest investment banks, Democrats in Congress said they plan to move quickly on legislation aimed at stabilizing financial markets by helping as many as 2 million homeowners avoid foreclosure.

House Financial Services Committee Chairman Barney Frank (D-Mass.) yesterday announced a hearing on the measure scheduled for April 9. In the Senate, aides said Majority Leader Harry M. Reid (D-Nev.) plans to work with Banking Committee Chairman Christopher J. Dodd (D-Conn.) to bring the legislation to a vote as quickly as possible.

The Federal Reserve "is running out of pages in its playbook to address the growing crisis of credit and confidence that has taken hold of our financial markets and threatens to undermine our nation's economy," Dodd said in a statement after the central bank yesterday announced another interest rate cut. "The Administration and Treasury should be equally aggressive in fashioning a non-monetary response that gets to the heart of this crisis -- the mortgage markets."

Frank and Dodd have reached agreement on a general approach to the problem but are drafting separate measures. Under both proposals, the Federal Housing Administration would be given a key role in helping to renegotiate distressed mortgages and would provide up to $300 billion in guarantees to new lenders.

The program would target homeowners who are facing foreclosure because they cannot afford the escalating cost of their mortgages. In better times, such homeowners would sell. But with home values plummeting across the nation, many houses are worth less than what their owners owe the banks.

Under the program envisioned by Frank and Dodd, a distressed homeowner could contact an FHA-approved lender for assistance. The new lender would determine how much the house is worth and how much the homeowner could reasonably afford to pay. The existing mortgage holder would then be asked to accept the lower amount, which would be paid in cash by the new lender. The mortgage would in turn be insured by the FHA.

Existing mortgage holders would take a substantial hit under the legislation: Frank's proposal would limit their payoff to 85 percent of the home's current appraised value. The banks also would be required to waive all fees and penalties.

Homeowners would have to pay for the FHA mortgage insurance and would owe the FHA a 3 percent exit fee when they sell their homes or refinance the new mortgage. They also would owe the FHA a portion of the profit if they sold within five years.

While some of the new mortgages would undoubtedly default, aides said the program would cost taxpayers little to nothing.

The Bush administration has resisted Democratic proposals to intervene on behalf of distressed homeowners. But as the Federal Reserve and administration officials labored last weekend to prevent the investment bank Bear Stearns from falling into bankruptcy, Dodd said he sensed a shift among some in the administration, including Treasury Secretary Henry M. Paulson.

"They didn't say, 'I will support your plan.' They did not sign on to a plan," Dodd said. But, he said, "I think they're far more supportive of this idea or something like it than they were a while ago."

Treasury officials yesterday disputed that notion. Congressional Republicans are also less than supportive.

Sen. Richard C. Shelby (Ala.), the senior Republican on the Banking Committee, has repeatedly stated his opposition to "any taxpayer bailout of lenders or borrowers." Yesterday, a spokesman said that Shelby was awaiting details on Dodd's plan but that the senator continues to have "a lot of questions and concerns about the proposal."

Meanwhile, the Office of Federal Housing Enterprise Oversight appeared poised to reduce the amount of capital that Fannie Mae and Freddie Mac must maintain as a cushion against losses. That would enable them to buy more mortgages and do more to compensate for flagging interest from other investors. The decrease in the capital requirement would enable Fannie Mae and Freddie Mac to increase their mortgage-related investments by a combined $200 billion, said a source who spoke on condition of anonymity because details have not yet been released.

OFHEO scheduled a news conference for this morning with the heads of the two companies.

Reports of such a deal helped drive up Fannie Mae's share price 27.1 percent yesterday and Freddie Mac's 26.2 percent.

Staff writer David S. Hilzenrath contributed to this report.

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