WASHINGTON (Reuters) - U.S. President George W. Bush proposed on Wednesday 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.
By Patrick Rucker and Tabassum Zakaria
WASHINGTON (Reuters) - U.S. President George W. Bush proposed on Wednesday 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 decreased 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 U.S. economy to the brink of recession, if not into one, threatening global growth.
!ADVERTISEMENT!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 U.S. Senate postponed a vote until Thursday on a bill, opposed by the White House, that would cost about $15 billion over 10 years to give a $6-billion tax break to home builders and other corporations and some aid to distressed homeowners.
In the House, the Ways and Means Committee on Wednesday approved a bill estimated to cost $11 billion that would offer, among several items, a temporary $7,500 tax credit -- that would be repayable like a loan -- to first-time home buyers.
Democrats have complained that the administration's efforts so far are too cumbersome to aid distressed borrowers in time to prevent foreclosure.
In August, the Bush administration announced one plan, dubbed FHA Secure, that was supposed to save tens of thousands of borrowers from foreclosure. Critics, however, contend that red tape stalled implementation and only a few hundred borrowers had been helped by the end of last year.
A plan proposed by Rep. Barney Frank, the Massachusetts Democrat who chairs the House of Representatives' Financial Services Committee, envisions bulk refinancing of loans headed for foreclosure. In testimony on Wednesday, lending regulators expressed misgivings about such an approach because it might not allow for a thorough review of the loans.
ENCOURAGING WRITE-DOWNS
At issue is how to prevent 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 U.S. 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 Financial Services Committee.
The U.S. 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 percent of subprime adjustable-rate mortgages were behind on payments, double the delinquency rate a year earlier, he said.
The National Community Reinvestment Coalition, a consumer rights advocacy group, estimated that more than 2 million homeowners would face foreclosure, and likened Bush's FHA proposal to "using a garden hose on a five-alarm fire."
"An expansion of FHA Secure makes a nice press release, but it is immaterial relative to the magnitude of the crisis," John Taylor, president of the NCRC, said in a statement.
FHA's Montgomery stressed that 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.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, backed the FHA plan, but noted that simply modifying troubled loans will not resolve the U.S. 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.
(Additional reporting by Kevin Drawbaugh, Glenn Somerville; Writing by Emily Kaiser; Editing by Leslie Adler and Carol Bishopric)
