In a Fix, GOP Drags Its Feet

By Steven Pearlstein
Wednesday, May 14, 2008

It's been about a year since the outlines of the mortgage crisis became clear, and over that time, many powerful interests have been forced to alter some cherished and long-held views.

The housing industrial complex -- from brokers to investment bankers -- has acknowledged the need for better regulation and oversight of its underwriting, marketing and financing practices.

Economic conservatives have conceded that the crisis cannot be handled by markets alone and that government intervention is sometimes necessary to prevent a housing meltdown from taking down the entire economy.

Fannie Mae and Freddie Mac, the 800-pound gorillas of mortgage finance, have accepted that they will have to live with a strong new regulator that has broad powers.

At the same time, critics of Fan and Fred now acknowledge that these government-sponsored but privately owned hybrids serve a vital role in providing liquidity to the mortgage market.

All of which makes it particularly curious why Congress and the Bush administration still cannot seem to come together on urgent legislation to deal with a trillion-dollar mortgage debacle that threatens U.S. and global economies.

We'll have a pretty good idea whether the legislative train has run off the tracks tomorrow when the Senate Banking Committee is scheduled to report its version of the legislation. If Republicans unite in voting against the bill, the chances of getting any legislation out of the closely divided Senate will be slim.

That was not the view just two weeks ago, as the House Financial Services Committee was preparing to mark up its version of the bill. The chairman, Democrat Barney Frank, had done a masterly job in winning over Republican members of the committee and gaining support for the bill from just about every industry group, along with consumer and housing advocates.

Frank had already pushed through the House legislation to create a strong new regulator for Fan and Fred that he had hammered out with Treasury, along with another administration-proposed bill to modernize the Federal Housing Administration (FHA). With both bills languishing in the Senate, Frank agreed to include updated versions in this year's effort on mortgage foreclosures.

In addition, Frank agreed to jettison a provision that would have allowed bankruptcy judges to modify mortgage loans, an idea popular with left-leaning Democrats but noxious to Wall Street and the mortgage industry.

In response to demands of the Bush administration, he tightened up on a new voluntary program to allow the FHA to refinance certain troubled mortgages if lenders agreed to write down the principal of the loan.

To accommodate mortgage service companies, Frank accepted a provision that would have shielded them from being sued by investors for entering into the workout agreements.

The bill passed the House last week, with more than three dozen Republicans voting for it. Why the House Republican leadership decided to oppose the bill remains a mystery. The most charitable explanation was that it ran afoul of its free-market ideology. The more likely explanation is that it understood that the economy had become the most salient political issue in the coming election, and it was determined to deny the Democrats who control Congress the chance to show they had done something about it.

Whatever the reason, Republicans leaders were apparently successful in pressing the White House to stop negotiating with Frank and oppose the legislation. Suddenly, Treasury officials who had signed off on the portions of the bill dealing with Fannie and Freddie began raising new objections. And the White House announced that President Bush would veto the bill, calling it a bailout for speculators and lenders and complaining, alternatively, that it would not help many homeowners and that it would cost far more than the estimated $2.5 billion over five years.

The White House arguments are unadulterated rubbish.

For starters, the refinancing program is limited to primary residences of people who live in the houses that are facing foreclosure -- in other words, homeowners, not speculators.

And in most instances it would require lenders to write off 25 percent or more of the original loan amount, while borrowers would be required to pay a 1.5-percentage-point fee a year to cover the cost of FHA insurance, an exit fee if they are able to refinance the loan or a portion of the profit if they wind up selling the house.

That is not a bailout -- it is nothing more than a modest extension of what the FHA has been doing for 70 years and what the Bush administration itself is proposing in its own FHA modernization plan.

As for the program's impact, I suppose it is possible that it won't wind up helping many people, just as it is possible that it becomes so wildly popular that it winds up refinancing millions of mortgages. But certainly both could not be true.

Is the House bill perfect? Of course not. There's special-interest junk in there that needs to be taken out. And some safeguards are probably necessary to ensure that the refinancing program doesn't attract lots of people whose credit histories are full of bad decisions and nonpayments. But these can be negotiated and fixed during the legislative process as long as there continues to be a good faith effort to get a good bill.

Unfortunately, that good faith is quickly evaporating thanks to the partisan posturing of House GOP leadership and the White House's cynical propaganda. This has only emboldened Senate Republicans, already an inflexible lot, to dig in their heels.

Yesterday, in a brief conversation, Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking Committee, went so far as to call the Senate version of the housing bill a "sham" as it relates to regulating Fannie and Freddie -- even though most of it closely tracks his proposal from 2005. Shelby made clear he would also oppose any program that would involve government funds to help homeowners avoid foreclosure. All of which undercuts his other promise, to meet the "the other side halfway."

According to the polls, Bush is already at risk of becoming the Herbert Hoover of the 21st century and congressional Republicans are well on their way to the most disastrous election since the post-Watergate balloting of 1974. They could certainly seal their fate by failing to strike a housing deal while it is within reach.

Steven Pearlstein will host a web discussion today at 11 a.m. athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.