By Lori Montgomery and David Cho
Washington Post Staff Writers
Saturday, March 29, 2008
The Bush administration is finalizing details of a plan to rescue thousands of homeowners at risk of foreclosure by helping them refinance into more affordable mortgages backed by public funds, government officials said.
The proposal is aimed at assisting borrowers who owe their banks more than their homes are worth because of plummeting prices, an issue at the heart of the nation's housing crisis. Under the plan, the Federal Housing Administration would encourage lenders to forgive a portion of those loans and issue new, smaller mortgages in exchange for the financial backing of the federal government.
The plan is similar to elements in legislation proposed two weeks ago by Barney Frank (D-Mass.), who chairs the House Financial Services Committee, officials said. Administration officials said they believe they can accomplish some of the same goals through regulatory changes, though important details have yet to be nailed down.
If enacted, the plan would mark the first time the White House has committed federal dollars to help the most hard-pressed borrowers, people struggling to repay loans that are huge relative to their incomes and the diminished value of their homes. That may offer encouragement to the banking industry and help silence Democrats, who have accused the White House of rescuing Wall Street investment banks while ignoring distressed homeowners. But it could agitate conservatives, who are likely to view the FHA plan as yet another government bailout.
Senior officials in several parts of the administration described the plan on condition of anonymity because the specifics are still being worked out. It is unclear when the plan will be formally unveiled, though one official said it was unlikely to happen before the president returns from a trip to Europe next week.
"The administration for a long time had the idealists and the pragmatists. And because the market conditions are what they are right now, the pragmatists are looking at this and saying, 'How can we achieve something?' And they seem to be having more sway," said Francis Creighton, vice president for government affairs at the Mortgage Bankers Association, which has been working with Frank on his proposal.
The initiative now being crafted could provide relief to a select group of homeowners who are "under water" on their mortgages, a term that describes the situation when falling home prices leave borrowers with negative equity. These homeowners would have to agree to stay in their homes after refinancing, be able to afford the new monthly payments and have lenders who are willing to go along with the plan, officials said.
Administration officials have yet to iron out other details, such as how big the new mortgage should be relative to the home's value.
An estimated 8.8 million households currently have negative equity, due in part to the rise of loans that often required no money down. Negative equity becomes a problem when the homeowner can no longer make mortgage payments. If the homeowner had some equity, the loan could be refinanced or the house could be sold. But a homeowner who is under water cannot afford to do those things because the new loan or sale proceeds would not cover the cost of the existing mortgage.
Treasury Secretary Henry M. Paulson Jr. signaled in a speech Wednesday that the administration was developing an initiative tailored to this specific problem, saying "the people we seek to help" are those who want to keep their homes but are falling behind on their payments. "If they also have negative equity in their homes, refinancing becomes almost impossible and so workouts become even more important," he said. He credited Alphonso Jackson, secretary of the Department of Housing and Urban Development, with helping to craft the plan.
In a recent report, Merrill Lynch identified negative equity as a prime cause of rising default rates, saying borrowers who already have poor credit records are often deciding it makes sense to walk away from their homes when the values fall.
Federal Reserve Chairman Ben S. Bernanke has called on lenders to restructure some loans, arguing that it would be less costly to forgive some debt than to foreclose on the properties.
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."