WASHINGTON – As Treasury Secretary Henry Paulson proposed overhauling the regulatory framework for the financial system, Democrats in Congress on Monday said it was far more urgent to try and quickly stabilize the housing market.
But even as Democratic lawmakers pledged to move swiftly on a plan to have the government guarantee $400 billion in troubled mortgages, industry experts said that help might come too late for many strapped borrowers.
Some mortgage industry experts say steps already taken by the government, such as cutting interest rates and giving government-sponsored mortgage companies Fannie Mae and Freddie Mac broader roles, may obviate the need for the mortgage-guarantee legislation.
“By the time it gets here, will it be necessary?” asked Keith Gumbinger, a senior vice president with financial publisher HSH Associates.
Others say the mortgage market is in such dire shape that any help is welcome. “The more resources you can put at this … the more likely you’re going to be able to get the market back in equilibrium,” said Brian Bethune, an economist with Global Insight.
Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., want the Federal Housing Administration, the Depression-era agency that insures mortgages, to guarantee $300 billion to $400 billion in refinanced loans to troubled borrowers.
It is just one of a flurry of housing proposals kicking around Congress, but it has garnered the most attention lately because of its scope. Other ideas pushed by Democrats include letting bankruptcy judges rewrite the terms of distressed mortgages and providing federal grants to help communities with large numbers of foreclosed properties.
Dodd, the chairman of the Senate Banking Committee, minimized the significance of the Paulson plan to ordinary Americans, saying the proposal to overhaul how banks and investment firms are regulated “has nothing to do with the current problems we’re facing.” He added: “We’ve got a contagion. We’re in a recession. … We’ve got people losing their homes, and this problem (is) spreading to other sectors of the economy.”
While some Republicans – particularly in hard-hit states such as Michigan, Ohio, Florida and California – are likely to latch on to housing rescue plans, Senate Republicans are likely to be more skeptical, said Brian Gardner, Washington analyst with Keefe, Bruyette & Woods Inc.
Gardner said the Dodd-Frank plan could be seen as interfering with market forces, especially as indications emerge that the housing market is improving, such as February’s unexpected 2.9 percent increase in existing home sales.
In recent weeks, the federal government has made significant new moves to aid the strapped market for mortgage investors, and Republicans are likely to argue that their impact needs to be evaluated before any broader changes are enacted.
Last Thursday, the Federal Reserve auctioned off $75 billion in Treasury securities in exchange for mortgage securities, part of a plan to assume $200 billion in difficult-to-sell mortgage investments.
In addition, the 12 regional banks in the Federal Home Loan Bank system were granted permission last week to increase purchases of Fannie Mae and Freddie Mac securities by $100 billion over two years. That came a week after the government made it easier for Fannie and Freddie to play a bigger role in financing home loans.
Critics also see the Frank-Dodd plan as rewarding both investors and borrowers for risky behavior and say that taxpayers would ultimately be on the hook should the refinanced mortgages fail in droves. In addition, it remains uncertain whether investors in mortgage securities would be eager to participate – given the hefty losses they would be likely to take.
The plan might pit the interests of some mortgage investors against others. Mortgages are commonly bundled into securities and divided into tranches, or slices.
Investors in the least-risky slices are likely to be less willing to see the value of their investments reduced because all the other investors in a mortgage security have to be hit with defaults before them, said David John, a senior fellow at the Heritage Foundation.
Another question surrounding the Frank-Dodd effort is how the value of homes will be determined. With property values falling, it may be difficult to agree on how houses should be appraised.