By Jeffrey H. Birnbaum and Lori Montgomery
Washington Post Staff Writer
Thursday, March 20, 2008
Now that the Federal Reserve has pledged billions of dollars to rescue Wall Street bankers from possible default, lawmakers and regulators are turning their attention to helping average citizens -- from homeowners in danger of foreclosure to people who want to buy a home.
But unlike the Fed's rapid moves last week to stabilize financial markets, the consumer benefits are likely to progress slowly as they face resistance from the Bush administration on some broad issues and from special interests on some narrow ones.
Bush officials are working with lawmakers on proposals that would help new home buyers and small investors by strengthening rules that govern mortgage lending.
The House, meanwhile, plans to move within weeks to approve a multibillion-dollar program to prevent hundreds of thousands of home foreclosures. The outlook for the plan, the most ambitious of several proposals, is uncertain; President Bush continues to resist large-scale legislation to bail out homeowners in distress.
"We have not seen any new ideas out there that we're willing to support," White House spokesman Tony Fratto said.
But Democratic congressional leaders and industry lobbyists do not see the president as immovable and expect that he will compromise eventually, pushed by Treasury Secretary Henry M. Paulson Jr. and other senior officials in his administration. "I think Paulson understands you need to move," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "But Paulson can't move as quickly as the rest of us."
Industry representatives agree. "There's real fear about where this crisis is going to end up," said Francis Creighton, a senior lobbyist for the Mortgage Bankers Association. "This administration appears to be ready to do what it needs to address this crisis."
On Sunday night, the Fed backed J.P. Morgan Chase's acquisition of the wounded investment firm Bear Stearns, promising to take the risk of up to $30 billion in troubled assets now on Bear's books, and increased the flow of money to other banks pinched for credit. The Fed could move quickly because it is sheltered from the politicking that surrounds administration and congressional initiatives.
So far, the administration is trying to work with the authority it already has. Yesterday, federal regulators increased the flow of mortgage money by giving the federally chartered mortgage finance giants Fannie Mae and Freddie Mac permission to increase their investment in mortgages by a combined $200 billion. That will improve the availability and affordability of home loans, the companies said.
Congressional Democrats said they want to do more and intend to press the president to accept their plans. "Democrats believe that the time is now to build on the Fed's efforts by taking action to ease the economic burdens facing everyday Americans," House Speaker Nancy Pelosi (Calif.) said in a statement. Senate Majority Leader Harry M. Reid (Nev.) added: "While it is important to calm the turmoil on Wall Street, we must just as urgently help the families and communities on Main Street who are threatened by this mortgage meltdown."
The Democrats are homing in on a proposal advanced last week by Frank and Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.). Under the measure, the Federal Housing Administration, which helps provide low-cost home loans, would be given a key role in helping renegotiate distressed mortgages and would provide insurance for up to $300 billion in new mortgages.
The program would target homeowners who are solvent and can afford reasonable mortgages, but who face foreclosure because their loan costs are escalating while the value of their homes is declining. A homeowner could seek help from an FHA-approved lender, which would determine the home's value and how much the homeowner could pay. The mortgage holder would be asked to accept the lower payment to clear the old mortgage, and the new one would be insured by the FHA.
Lenders would take a big hit under the legislation. The proposal would limit their payoff to 85 percent of the home's appraised value. At the same time, borrowers would help fund the program by paying FHA mortgage insurance.
Frank has scheduled two days of hearings on the proposal in the House. In the Senate, aides to Dodd said the measure might be attached to a larger "housing stimulus" package that Reid hopes to bring to a vote early this spring.
Under that larger measure, bankruptcy judges would be permitted to alter the terms of mortgages for primary residences by lowering the interest rate, extending the life of the loan or forgiving part of the loan's principal. Advocacy groups have said the legislation would help hundreds of thousands of borrowers keep their homes. But it was blocked in the Senate earlier this year; the president and several bank lobbies opposed it because they said it would lead to higher mortgage rates.
Another proposal pending in Congress would overhaul the FHA. The House and Senate have passed different versions of the plan, which would reduce the down payment requirements for FHA-backed loans. The Senate bill would lower the limit from 3 percent to 1.5 percent, while the House would eliminate the need for a down payment.
The legislation would also require lenders to give homeowners more notice before raising their interest rates or putting them into foreclosure.
In addition, the House version of the legislation would insist that states do a thorough job of overseeing mortgage brokers or the Department of Housing and Urban Development would be asked to take over the task.
Regulators are also considering a variety of suggestions offered last week by the President's Working Group on Financial Markets, a high-level advisory panel consisting of the federal government's top financial-market overseers. Mortgage brokers were in part blamed for allowing so many homeowners to purchase loans they could not afford.
The working group recommended that the brokers be subjected to tougher licensing and enforcement standards and that safeguards against mortgage fraud be tightened. The National Association of Mortgage Brokers called the suggestions "flawed" and said that other players in mortgage lending should also be included in any crackdown.
The American Bankers Association supported efforts to rein in mortgage brokers, but worried that the states would not have enough funds to pay for their oversight. Rules are also pending from the Fed and HUD that would require more disclosures by lenders and borrowers before a home can be bought with a mortgage.
Bush's working group called for more transparency in how credit-rating agencies assess the risk of mortgage-backed securities -- a plan the agencies are not resisting. Some of the packaged mortgages that are now expected to go bad were given high ratings when they originated.
Staff writer Renae Merle contributed to this report.