Senate Strikes Housing Rescue Deal
Plan Would Insure Up to
$300 Billion in Home Loans;
Encouraging Note From Bush
WASHINGTON -- A Senate agreement pushed Congress significantly closer toward a bill that would expand the federal government's role in propping up the housing market.
After weeks of negotiations, Sen. Chris Dodd, a Democrat, and Republican Sen. Richard Shelby completed a plan Monday that would allow the government to insure up to $300 billion in refinanced loans for struggling homeowners. In a nod to a longstanding Republican concern, the agreement would also overhaul supervision of Fannie Mae and Freddie Mac, the enterprises that provide the lion's share of funding for U.S. mortgages.
While several hurdles remain, the bipartisan agreement, combined with positive signals from the White House, represents the clearest sign yet that Washington is ready for major legislation on housing. Some are comparing the bill to the 2002 Sarbanes-Oxley Act, enacted in response to Enron's collapse and other corporate scandals.
"We've taken the word 'partisan' out of this," said Sen. Dodd of Connecticut, who is chairman of the Senate Banking Committee. Added Sen. Shelby: "I believe we will get overwhelming support, and I believe the president will sign it." The Senate panel is slated to vote on the plan Tuesday morning.
The House of Representatives passed a similar bill earlier this month, but the White House threatened to block it. Some conservatives fear that taxpayers could be on the hook for billions of dollars if homeowners who receive a government guarantee on their loans later default.
Senate lawmakers addressed this objection in a provision crafted in part by Sen. Jack Reed (D., R.I.). The provision calls for initial losses on defaulted loans to be covered by fees charged to Fannie Mae and Freddie Mac.
President Bush appeared to offer partial support for the Senate's efforts. Referring to the moves to bolster supervision of Fannie Mae and Freddie Mac, he said, "Congress is making progress." This was a shift from previous White House veto threats.
Mr. Bush said in brief comments at the Oval Office: "We look forward to working with Congress to get a good piece of legislation to my desk that helps our fellow citizens, and helps us get through this housing issue."
Rep. Barney Frank, chairman of the House Financial Services Committee and a prominent voice on housing, also suggested that the Senate deal, following the House vote, could ease passage for a final bill. "The two bills are very close. They are clearly not identical," said Rep. Frank, a Democrat. "We will have conversations about it."
The deal comes as members of both parties face pressure to act on housing-market problems plaguing the broader economy. Democrats want to go into the November elections with evidence of a major legislative victory, and some Republicans, especially in areas hard-hit by the housing downturn, have shown flexibility in backing big government intervention. In the House bill, 39 Republicans voted with Democrats in support.
The bipartisan deal is a significant change from the messy political fight two years ago, when Republicans, the White House and the Federal Reserve demanded strict limits on Fannie Mae and Freddie Mac following major accounting scandals at both firms. In 2006, Senate Democrats, Fannie Mae and Freddie Mac successfully fended off legislation that would limit the types of assets the companies could hold in their portfolios. Later that year, Treasury Secretary Henry Paulson began negotiating directly with Rep. Frank in an effort to broker a compromise.
Congress's efforts could still fall apart. One possible area of controversy: The Fannie and Freddie fees that the Senate plan would direct into the new program were originally conceived by House Democrats as a funding source for affordable-housing programs. Liberal groups have already said they will fight the plan. Sen. Dodd said the money would be diverted from affordable-housing projects only for the first year or so.
Another politically sensitive point is whether borrowers deserve the help they would receive under the Senate plan. The program would cover borrowers who owe more than their homes are worth. For these borrowers to qualify for a new government-insured loan, their lenders would have to cut the size of the outstanding principal to a level that gives the borrower equity in the property. The concept has the implicit backing of Federal Reserve Chairman Ben Bernanke, who said such a move could help stabilize the housing market.
The new loans would be guaranteed by the Federal Housing Administration. Some critics say borrowers who got in over their heads shouldn't get any government help. Supporters of the idea say the government has an interest in keeping communities intact.
"We look forward to seeing the details of the bill...especially provisions to expand programs of the Federal Housing Administration," White House spokesman Tony Fratto said.
One practical issue: Lenders thus far appear reluctant to voluntarily write down the value of loans, even though this may be a cheaper option than foreclosure. Nonetheless, congressional staffers said the expanded FHA program is expected to help between 500,000 and one million people refinance into more affordable loans.
Thomas Lawler, a housing economist in Leesburg, Va., says he doubts the package will "put a floor" under the market, as Sen. Dodd predicted. Writing down the principal owed by distressed borrowers will be only the "last resort" of lenders, which are more inclined to reduce interest payments or give borrowers more time to repay their loans, Mr. Lawler said.
Moreover, Congress may be finally acting at a point when the worst appears to have passed. For instance, Mr. Lawler said, home sales have begun to rebound in areas where lenders have slashed prices on foreclosed properties. "The housing market is putting a floor under itself," he said.
Tempted to Fall Behind
Ivy Zelman, an independent housing analyst based in Cleveland, said, "It's going to be helpful, but it's basically not going to stop the bleeding in 2008," partly because it will take time for the new FHA program to get up and running. She also sees a risk that some borrowers who are current on their mortgages will be tempted to fall behind so they can qualify for a loan with easier terms.
Before the House passed its version of the bill earlier this month, the Congressional Budget Office estimated the government-insurance program would require a $1.7 billion government subsidy. But Sen. Dodd said he expects the costs of the program to be around $500 million. By requiring Fannie and Freddie to foot those costs, Congress could avoid a taxpayer-funded mortgage-assistance program of the type opposed by the White House.
"I think this is a victory for the taxpayers as far as housing is concerned," Sen. Shelby said. Sen. Dodd said he hoped the legislation would set a "floor" under the housing market, restoring confidence. "This is what the market has been waiting for," he said.
A New Agency
The legislation agreed upon Monday would also create a new, more powerful agency to regulate Fannie and Freddie, the government-sponsored mortgage investors. Congress has struggled with that issue for years. The legislation would allow the new regulator to set higher capital requirements for Fannie and Freddie, which have long been allowed to operate with minimal levels of capital relative to their assets.
The current requirements were set by 1992 legislation and are widely considered outdated. At present, Fannie and Freddie each have "core" capital equaling less than 2% of the mortgages they own or guarantee. Fannie's core capital as of March 31 was about $43 billion, and the company has since raised about $6.5 billion more through sales of common and preferred shares, bringing the total to around $50 billion.
If Fannie were a bank, regulators would require it to hold $135 billion of capital to be considered "well-capitalized," estimated Karen Petrou, managing partner at research firm Federal Financial Analytics in Washington.
The Senate deal, if eventually enacted, isn't expected to completely appease consumer and affordable-housing groups pushing for legislation that would allow bankruptcy-court judges to alter the terms of certain mortgages in foreclosure.
"That's the only thing that will help homeowners now," said Ed Mierzwinski, federal consumer program director at the U.S. PIRG, which is the federation of state Public Interest Research Groups.
On another issue of concern to liberals, the House passed a bill last year that would create an affordable housing fund financed by Fannie Mae and Freddie Mac. The House version would fund roughly $1 billion each year for states and cities to produce, rehabilitate, and preserve close to 1.5 million housing units over 10 years. The White House threatened to veto that measure, and the Senate never acted on it. This could be a stumbling block.
"The affordable housing trust fund is very important to us," Rep. Frank said.
Write to Damian Paletta at damian.paletta@wsj.com and James R. Hagerty at bob.hagerty@wsj.com |
