Federal action on mortgages gaining steam
From Wall Street to Capitol Hill, calls are growing for the government to get into the mortgage business as the only way out of the housing crisis roiling the economy and the financial markets. Proposals to shore up tottering home loans with taxpayer money are gaining traction in Congress and moving to the forefront of presidential politics.
Federal Reserve Board Chairman Ben Bernanke also has called on lenders to reduce the amount of principal that troubled homeowners owe on their loans.
The Fed recently has been taking a series of aggressive steps to assist financial companies staggered by the credit crunch – including providing a $30 billion, short-term loan to JPMorgan Chase & Co. to facilitate its purchase of Bear Stearns.
Democratic contender Sen. Hillary Rodham Clinton cited that action this week in calling for an initiative to provide $30 billion to help homeowners.
“If we can extend a $30 billion lifeline to avoid a crisis for Wall Street banks, we should extend at least $30 billion in immediate assistance to at-risk communities and families facing foreclosure,” Clinton’s campaign said in a statement.
But while the Fed can help lenders and the investment industry, it has little authority to help individual borrowers or to force their lenders to modify repayment terms so that strapped borrowers can stay in their homes. That is putting pressure on Congress to step into the breach.
“It does seem increasingly likely that we’re headed toward a compromise on taxpayer assistance to prevent a greater number of foreclosures,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
The Bush administration has resisted anything that resembles a taxpayer-financed homeowner bailout. Instead, it has placed its faith in several programs that encourage lenders and distressed homeowners to work things out voluntarily.
And Treasury Secretary Henry Paulson, a former chief executive of the investment bank Goldman Sachs & Co., has said he believes the housing bubble should be allowed to work itself out naturally.
Critics say that’s tantamount to bailing out the big players while throwing the little guy to the wolves, and that a more even-handed approach will make any government action more broadly palatable.
“Some say, let market discipline rule,” said Jared Bernstein, an economist at the liberal Economic Policy Institute in Washington. “But some banks are too big to fail and some homeowners don’t deserve to lose their shirts.”
Still, a homeowner “bailout” could be a political minefield. Any relief program will have to be carefully fashioned to focus on deserving homeowners whose financial ills are no fault of their own. Otherwise, the program could face a backlash from voters who feel they played by the rules, only to have their tax money paid out to the imprudent or the crooked.
“All the talk about bailing people out is really a slap in the face of those of us who have been financially responsible,” said George Sylak, 43, a television producer from Los Angeles who is renting his home. “Now the federal government and the candidates are saying, ‘You didn’t need to be responsible.’ ”
Others contend that what looks on the surface to be a rescue of homeowners would be a bailout of lenders who unscrupulously enticed borrowers into loans destined for trouble.
“If businesses don’t want to modify their own loans, then letting the government do it just means the government taking on the risks that the lenders don’t want,” said Marc Itzkowitz, a Palo Alto, Calif., software marketing executive.
Itzkowitz said he has remained a renter because he thought that buying a home in a superheated market seemed “imprudent.”
“Not letting people meet the consequences of their actions just means that there won’t be a lesson for them, and 10 years from now we’ll be doing this again,” he said.
Some economists say the housing crisis is reaching such magnitude that it threatens to push the economy at large into a severe recession, a situation that would make the “moral hazard” debate seem irrelevant.
Nationally, foreclosures in February ran nearly 60 percent ahead of the figure a year earlier, according to RealtyTrac, a foreclosure-tracking service based in Irvine, Calif. More than 223,000 homes received loan default notices, the first step toward a foreclosure, the company said.
One way to balance government assistance to participants in the credit crisis – whether it’s branded a “bailout” or a “rescue” – is to link it to stricter regulation of lenders and borrowers.
Among a number of rescue plans before Congress, perhaps the one with the most political clout behind it is a proposal sponsored by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee.
The Dodd-Frank plan would grant the Federal Housing Administration vastly expanded powers and as much as $300 billion in new funding to refinance troubled mortgages – essentially taking them off their lenders’ hands.
The program would be directed at homes with values that had fallen below the balances due on their mortgages. These are the homes most likely to wind up in foreclosure.
Under the plan, the lender would be paid to surrender the mortgage – but would get no more than 85 percent of the home’s appraised value. The amount would be less than the value of the original mortgage but presumably higher than what would be received if the bank were forced to reclaim and resell the property.
The borrower would get a new loan on more manageable terms. The deal would be offered only to homes that are occupied by borrowers as their primary residence, which is designed to exclude speculators and vacation homes. If the home is sold within five years, moreover, the government would get a percentage of any profit to discourage “flipping.” Frank’s committee estimates that the program could refinance as many as 2 million homes.