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Senate Talks Collapse On a Housing Bill
Dodd Calls Drafting Session for His Plan

By Lori Montgomery and Jeffrey H. Birnbaum
Washington Post Staff Writers
Tuesday, May 13, 2008

Hope dimmed yesterday that Congress would act quickly to rescue homeowners at risk of foreclosure after key Republican and Democratic negotiators in the Senate said they could not reach agreement on a plan.

Talks broke down late Friday between aides to Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) and the senior Republican on his committee, Richard C. Shelby (Ala.), aides said. The two camps had been trying for more than a month to develop a bipartisan proposal to ease the nation's housing crisis.

Yesterday, Dodd unveiled his own housing bill, which would help troubled borrowers trade exotic mortgages with escalating monthly payments for more affordable loans backed by the federal government. It also would strengthen regulation of mortgage giants Fannie Mae and Freddie Mac. Dodd scheduled a committee drafting session for Thursday.

The bill is similar to legislation that passed the House last week despite a White House veto threat. It is unlikely to win approval in the Senate without Shelby's support.

Last night, Jonathan Graffeo, a spokesman for Shelby, left the door open to further talks, saying "it remains to be seen whether an agreement can be reached."

Congress has been struggling for months to respond to a mortgage crisis that has left more than 1.2 million homes in foreclosure, with an additional 3 million forecast to join them over the next two years. Most involve subprime loans that established terms the borrowers could not afford. As homeowners defaulted and fell into foreclosure, home prices fell more than 10 percent. Many borrowers who are having trouble making payments find that they cannot sell or refinance their homes because they owe their banks more than their homes are worth.

The Bush administration has tried to help such borrowers by urging banks to reduce their mortgage debt. The administration also has eased eligibility standards so borrowers who have missed a few payments can qualify for cheaper loans insured by the federal government through the Federal Housing Administration. But those initiatives have helped relatively few families.

Under Dodd's proposal, the FHA would respond more aggressively by offering to insure mortgages for less creditworthy borrowers if their banks forgave a portion of the debt. The measure would require lenders to take a significant loss by permitting borrowers to pay off their original loans with new loans worth no more than 90 percent of their homes' current, lower value.

Borrowers would get smaller monthly payments and an immediate equity stake in their property. But if home values rise, the plan requires homeowners to share their profits with the federal government when they sell or refinance.

The FHA would be authorized to insure up to $300 billion worth of such loans, which are far more likely to default than loans in the FHA's current portfolio.

Dodd's proposal also would seek to improve regulation of Fannie Mae and Freddie Mac, the nation's largest financiers of home mortgages. Shelby has been pushing to require the companies to hold more capital against potential losses. But Democrats have been reluctant to force the companies to significantly enlarge that cushion.

In a statement, Dodd said the bill would establish a new regulator for the government-sponsored enterprises, such as Fannie Mae and Freddie Mac, "that has robust new powers to regulate safety and soundness, capital, portfolio holdings, and internal management." He added that the measure would also ensure that "the GSEs can better meet their mission of providing a source of affordable financing for homeownership."

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