Bush Readies Mortgage Aid Plan

Sebastian Villalba mows the lawn of a house to be sold at foreclosure auction in Laguna Hills, Calif. (By David Mcnew -- Getty Images)

So far, the centerpiece of the administration's effort to address foreclosures has relied on a private alliance, called Hope Now, to streamline the process for refinancing, modifying mortgages and offering delays for some on the brink of foreclosure. Lenders have been reluctant, however, to offer actual reductions in loan principal.

To spur bankers to action, Frank and other Democrats are working on legislation that would allow the FHA to insure an additional $300 billion in mortgages on which lenders have agreed to accept partial losses. Under Frank's proposal, the new loan could be worth no more than 85 percent of the home's current appraised value. It would also have to meet FHA loan limits, which were raised significantly by the economic stimulus bill recently signed by the president and are currently set at about $730,000 in the Washington area. Homeowners would have to meet stringent eligibility requirements and would be required to share any profits if they sold or refinanced within five years.

Frank estimates that his plan could save as many as 2 million homeowners from foreclosure. Administration officials said their plan is likely to help far fewer people. These officials remain strongly opposed to other elements of Frank's legislation, including a provision to spend $10 billion buying vacant foreclosed homes.

Depending on its final scope, the proposal could further rile conservatives in Congress alarmed by what they see as a new tendency by the White House to interfere with market forces. The Fed's decision to arrange the purchase of beleaguered Wall Street investment bank Bear Stearns by J.P. Morgan Chase -- with the blessing of the White House -- has already generated grumbling.

Earlier this week, Iowa Sen. Charles E. Grassley, the ranking Republican on the Senate Finance Committee, joined the committee's chairman, Max Baucus (D-Mont.), in raising questions about the Bear Stearns deal and demanding information about the role Paulson played in the transaction.

"I've been hearing from the administration that they weren't going to do things" that reward risky behavior. "I want that affirmed," Grassley said. "To the extent that Treasury or the White House was pushing Bernanke to do something . . . that would really disturb me."

Many conservative analysts who oppose government intervention in financial markets nonetheless support the Bear Stearns deal.

Sen. Tom Coburn (R-Okla.) said he hoped that "the administration is not into subsidizing stupid behavior. It's one thing to help people who made a rational decision, who were spammed or defrauded. But it's another thing to reward people who thought they were getting something for nothing, and knew what they were getting into."