By Lori Montgomery
Washington Post Staff Writer
Thursday, July 24, 2008
The House yesterday easily approved legislation that seeks to slow the steepest slide in house prices in a generation, rescue hundreds of thousands of homeowners at risk of foreclosure and reassure global markets that mortgage-finance giants Fannie Mae and Freddie Mac will not be allowed to fail.
The Senate plans to vote on the bill within days and send it to President Bush. The White House announced that Bush would sign the measure, Washington's most ambitious response to a housing crisis that has pushed more than 1.5 million families into foreclosure and shattered investors' confidence in some of the nation's largest financial institutions.
Although Bush continues to oppose a provision that offers $3.9 billion to communities devastated by foreclosures, he rescinded a veto threat after Treasury Secretary Henry M. Paulson Jr. persuaded him that the overall measure was urgently needed to stabilize the housing and credit markets, said White House press secretary Dana Perino.
"This is not the time for a prolonged veto fight, although we're confident that the president would prevail in one," Perino told reporters. "But with Congress scheduled to leave soon for yet another recess, the risk of not having a bill until the middle of September is not a risk worth taking in the current environment."
House leaders predicted that lenders would offer to forgive a portion of struggling homeowners' debt and help them trade high-cost mortgages for more affordable government-backed loans within weeks.
"I would be very disappointed if, having helped us formulate this, they don't take advantage of it," House Financial Services Committee Chairman Barney Frank (D-Mass.), said of the banks.
In addition to mortgage bankers, interest groups as varied as home builders, real estate agents and civil rights groups back the legislation. The final package was assembled during intense bipartisan negotiations between House and Senate leaders and Paulson, who approached lawmakers two weeks ago seeking emergency authority to prop up Fannie Mae and Freddie Mac after a precipitous drop in the firms' share prices.
The mortgage-finance firms, which are government-sponsored but investor-owned, together own or guarantee about half of the nation's outstanding mortgages. Concern about their financial health has destabilized the markets and is driving interest rates for home loans toward their highest level in five years.
The need to calm investors added urgency to legislation that has been wending its way through Congress since April. The measure would grant Paulson immediate but temporary authority to extend an unlimited line of credit to Fannie Mae and Freddie Mac or to buy their stock if their financial condition deteriorates sharply before December 2009.
Democrats abandoned efforts to mandate specific protections for taxpayers, such as a requirement that the companies suspend dividend payments to shareholders as a precondition of receiving federal aid. Instead, the measure instructs Paulson to set the terms of any bailout.
"We said, 'You have to protect the taxpayer, but how you do it is up to you,' " said Frank, a key sponsor of the bill. "Going to the market is a tricky business. And I think tying his hands . . . is a mistake."
The Federal Reserve Board would have "consultative" authority over Fannie Mae and Freddie Mac until the legislation expires in December 2009. The legislation also would create a strong new regulator for the firms, with explicit authority over compensation for their chief executives, who take home millions of dollars a year.
Lawmakers rejected Paulson's request to prevent any public aid to the firms from being counted as part of the federal deficit. Instead, the measure would raise the legal debt limit to $10.6 trillion -- an increase of $800 billion -- giving Paulson a large cushion should aid to the firms become necessary. As of yesterday, the national debt stood at $9.5 trillion.
Paulson has said he is unlikely to need the new authority because the firms are financially sound, and congressional budget analysts agree that it is unlikely to be implemented, saying the cost to taxpayers should be less than $25 billion. In a statement, Paulson praised lawmakers for acting quickly on a measure that would "give confidence to markets and will create a strong, independent regulator better able to address the risks these enterprises pose."
Despite the administration's call for speed, only 45 Republicans joined a largely united Democratic caucus to approve the measure in the House, 272 to 152. House Minority Leader John A. Boehner (R-Ohio) said he was "disappointed that the White House has indicated that they'll sign the bill" and urged lawmakers to vote against it, saying the plan would permit private shareholders to reap profits but stick taxpayers with losses.
"That is not responsible," said Rep. Paul D. Ryan (R-Wis.) "We should reform these institutions now. Either privatize them or publicize them."
Sen. Jim DeMint (R-S.C.) vowed to delay passage in the Senate until at least Saturday, saying he wanted to add an amendment that would bar Fannie Mae and Freddie Mac from lobbying Congress if the firms become indebted to the federal government.
In addition to the rescue plan for the mortgage-finance firms, the package includes a plan to rescue more than 400,000 homeowners at risk of foreclosure by helping them trade high-cost loans with rapidly rising monthly payments for more-affordable mortgages backed by the Federal Housing Administration. As home prices fall, many of those borrowers now owe their banks more than their homes are worth and find it impossible either to make their mortgage payments or to sell or refinance their homes.
For those borrowers, the FHA would offer to guarantee new mortgages if lenders agree to forgive a portion of the debt and permit a new loan to be issued for no more than 87 percent of the new, lower value of their properties.
The FHA, as well as Fannie Mae and Freddie Mac, would be given permanent authority to assist borrowers with much larger home loans, as the bill would increase the cap on the size of those loans to $625,000.
First-time home buyers who purchased a house from April 9, 2008, and July 1, 2009, would be eligible for a tax credit worth up to $7,500, though the credit would eventually have to be repaid to the Treasury. Homeowners who do not currently itemize would be able to claim a new property tax deduction of $500 for individuals and $1,000 for families, a provision that would primarily help older homeowners who have paid off their mortgages.
Democrats say the aid to communities to purchase vacant and foreclosed properties would help stabilize urban neighborhoods hit hard by the mortgage crisis; the administration says it would primarily benefit lenders who foreclosed on the properties.