Support is growing on several fronts in Washington for mortgage-industry reforms and homeowner-assistance programs with broader potential impact than the Bush administration's plan to freeze interest rates on a small percentage of home loans.
So far, the government has pursued modest responses to this year's surge in mortgage defaults and home foreclosures. But mounting foreclosures, fears of a recession and an upcoming election are prompting a range of more aggressive proposals from Congress, the Federal Reserve and consumer groups.
The Bush administration favors restraint, with President Bush saying Monday that the "the government should never bail out lenders." Still, the president noted that Treasury Secretary Henry Paulson is working with Rep. Barney Frank, D.-Mass., on a plan to allow Fannie Mae and Freddie Mac to finance larger loans, in conjunction with tighter regulation of the government sponsored companies.
Several housing-related bills had been stalled in Congress for much of the year. On Friday, though, the Senate overwhelmingly approved bills that would allow more government-backed loans to borrowers with weak credit and permit homeowners to receive tax-free mortgage forgiveness from their lenders. The IRS currently taxes any loan forgiveness as income.
These two measures have bipartisan support and appear likely to be signed by the president next year. Other proposals are more divisive and likely to be the subject of heated debate in Congress.
On Tuesday, the Federal Reserve is expected to propose a new set of reforms for the home-loan market, including requiring lenders to borrowers with spotty credit to set aside money for property taxes and insurance, and restricting loans that do not require proof of a borrower's income.
However, the Fed's actions are unlikely to diminish Democrats' desire for stricter protections for borrowers. Analysts say House and Senate Democrats are likely to push for more stringent restrictions next year.
"The drumbeat of bad news about mortgage delinquencies and foreclosures will keep the issue at the front of the policy debate," said Douglas Elmendorf, a senior fellow at the Brookings Institution.
Several proposals are already being floated:
- Alan Greenspan, former chairman of the Federal Reserve, suggested in a TV interview over the weekend that more government intervention was needed to help borrowers. "Cash is available and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this," Greenspan said Sunday during an appearance on ABC's "This Week," offering few specifics.
- The Center for American Progress, a liberal public policy think tank, last week proposed the creation of a new government agency, the Family Foreclosure Rescue Corp., that would help borrowers whose home value has declined to less than that of their mortgage by providing fixed-rate loans and issuing government-insured bonds to pay for the efforts.
- Democrats and consumer groups are advancing legislation to bar abusive lending practices and to allow bankruptcy judges to reduce the size of a borrowers' home loans in court. Advocates say this change could help 500,000 borrowers or more, compared with around 250,000 likely to be helped by the Bush administration's plan to freeze introductory interest rates for some borrowers.
Some Republicans and lending industry lobbyists warn that an overreaction in Washington will limit access to mortgage loans just when they are needed most.
Republicans have backed limited responses, such as the bill passed by the Senate last week to raise the maximum mortgage the Federal Housing Administration can insure in high-cost areas from $362,790 to $417,000.
The government estimates that 200,000 more borrowers would be aided next year through the legislation — including new buyers and existing borrowers trying to refinance into new loans. The FHA currently insures 3.7 million loans.
The real estate industry has long pushed for this change, saying that the size of mortgages the government agency can back is often too small to attract borrowers in expensive areas such as California and the Northeast.
Experts say the effort is especially important right now because lenders focusing on borrowers with poor credit have disappeared and investors facing huge losses on mortgages securities are avoiding riskier loans.
But many borrowers are still likely to be without help, analysts say, because the FHA has stricter requirements for loans than lenders to borrowers with spotty credit whose business has crashed this year.
For example, the agency requires borrowers to make a 3 percent down payment and document their incomes.