US President George W. Bush proposed expanding a program to help homeowners meet mortgage payments while Democratic lawmakers pressed ahead with a broader plan, setting the stage for a political showdown over how best to aid the housing market.
Bush approved a plan that would insure mortgage loans for homeowners who may have missed payments, were facing the prospect of higher interest rates and whose homes had fallen in value. The White House said it would help about 500,000 borrowers by the end of this year.
The move comes as political pressure builds for more dramatic government intervention to prop up a housing market that has pushed the US economy to the brink of recession, if not into one, threatening global growth.
Failing mortgage loans are at the root of the financial market turmoil that has cost banks some $200 billion in write-downs and choked off the flow of credit to companies and consumers around the world.
“This is not a silver bullet that will solve all the problems in housing, but it will help some additional people stay in their homes, and that's something the president wants to see,” White House spokeswoman Dana Perino said.
Bush has steadfastly refused to commit public funds to bail out the housing sector. The US Senate is expected to vote later on Wednesday on a bill, opposed by the White House, that would cost as much as $20 billion to provide tax breaks and other assistance to builders, companies and homeowners.
At issue is how to prevent a wave of foreclosures from driving millions of people out of their homes as rising interest rates and falling home values wipe out hundreds of billions of dollars in housing equity.
With households feeling poorer and coping with rising costs for basics such as food and fuel, consumer spending has faltered, cracking the foundation of the US economy.
Under Bush's plan, the Federal Housing Administration would underwrite loans that have sunk in value if the lender will first erase a share of the existing loan.
“We will permit and encourage lenders to voluntarily write down outstanding principal,” FHA Director Brian Montgomery told the House of Representatives' Financial Services Committee.
The US Federal Reserve has encouraged banks to consider writing down the value of loans when homes are worth less than the mortgage amount.
Fed Governor Randall Kroszner told the committee that home foreclosures in 2008 would top the 1.5 million seen in 2007. In January, some 24% of subprime adjustable rate mortgages were behind on payments, double the fraction that were delinquent a year earlier, he said.
Kroszner also said that given the scale of the country's housing woes, “it is in everyone's interest to develop prudent loan modification programs.”
FHA's Montgomery stressed that the he did not want to put taxpayers on the hook for failing loans. Unlike a proposal by Democratic lawmakers, the plan outlined by Montgomery would not require a big cash infusion to get started.
“This new administrative change will ensure the integrity of the FHA insurance fund over the long term, protect the taxpayer and guarantee that FHA will be around to help struggling homeowners in the future,” he said.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, backed the FHA plan, but noted that simply modifying troubled loans will not resolve the current US housing crisis and a government backstop was needed.
“Loan modifications were never intended to be the sole solution to the problems in the mortgage market,” she said at the hearing. “It is appropriate that policy-makers carefully consider additional tools.”
Bair, who oversees the national deposit insurance fund, said speculators who helped fuel an overheated housing market should now help bail out troubled borrowers. (Reuters)