WASHINGTON – Congressional leaders Tuesday gathered support for aggressive changes to bankruptcy laws that would help troubled homeowners, even as the Bush administration threatened to veto the plan and emphasized its opposition to any program that would risk tax dollars.
Democrats are calling for the government to do more than the administration has to date. They proposed a range of initiatives that include a federal agency to purchase troubled mortgage securities to empowering bankruptcy judges to change the terms of high-interest loans held by homeowners facing foreclosure.
But the administration said that changing mortgage terms retroactively for a select group of troubled borrowers would only add to lenders’ woes and lead to higher mortgage rates for everyone.
The clash highlighted sharp differences between Democrats and the Bush administration over how to solve the nation’s worst mortgage crisis since the Great Depression.
“Homeowners at risk of foreclosure are floating 50 feet from shore and the Bush administration has thrown them a 30-foot rope,” said Sen. Dick Durbin, D-Ill., the author of a proposal that would allow bankruptcy judges to change the interest rates on subprime, adjustable and other “non-traditional” loans for homeowners facing foreclosure.
The White House and Treasury officials took pains Tuesday to communicate a broader message, aimed at Capitol Hill and Wall Street: It would oppose the use of tax dollars to rescue banks, investors and homebuyers who made foolish financial decisions. It instead is counting on a plan that calls for the banking industry to voluntarily work out new loans with homeowners.
“We shouldn’t be bailing out banks and investors and our focus is on the homeowners,” said Robert Steel, undersecretary for domestic finance at the Treasury Department. “And some of these programs seem to be bailing out banks and investors.”
That position puts the administration at odds with some of its own allies who want a more vigorous response, including congressional Republicans from states suffering severe housing downturns and some of the biggest players in the ailing financial sector.
The Mortgage Bankers Association, for example, has opposed the bankruptcy measure but hoped the government would buy distressed mortgage securities.
Senate Democrats say there are enough Republicans willing to break ranks with the White House to allow debate on some of the proposals.
Sen. Arlen Specter, R-Pa., whose state faces rampant foreclosures, has proposed legislation that goes beyond what the White House would tolerate. Specter wants to give bankruptcy judges the authority to roll back rates on variable interest loans, but is proposing a more limited plan than Durbin’s.
Other leading proposals by Democrats include expanding the Federal Housing Authority’s capacity to buy distressed mortgage securities from Wall Street banks at extreme discounts and appropriating $4 billion to state and local governments to redevelop homes in foreclosure.
The most controversial, however, is Durbin’s proposal, which would allow bankruptcy judges to cut the interest rates of home loans to the prime rate plus a “reasonable” premium for owners who cannot afford their subprime mortgages or other “non-traditional” loans. This would reduce payments and allow them to keep their homes after emerging from bankruptcy.
Durbin said his proposal would extend to homeowners the same kind of protections that already apply to family farms, vacation condos and yachts.
“If I go into bankruptcy, a court can renegotiate the terms on my vacation condo but is prohibited from renegotiating the terms on my home,” said Durbin, whose plan is backed by labor and civil rights groups, the AARP and credit unions. “It makes no sense whatsoever.”
The threat of a court-ordered change in interest rates would be enough incentive to convince lenders to voluntarily renegotiate the terms of failing loans before a homeowner is forced to declare bankruptcy, he said.
But the idea is vehemently opposed by the White House.
“We look at this bill as a bailout, but worse than that, it is interfering with contracts,” said Tony Fratto, White House deputy press secretary. “If you start going into those contracts and if you expose mortgages to that kind of risk, it has upward pressure on mortgage rates … and that’s the last thing we need right now.”