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    Housing Woes Put Bush, Hill at Odds
    By David Cho and Lyndsey Layton
    The Washington Post

    Wednesday 27 February 2008

White House opposes use of tax dollars.

    Congressional leaders yesterday 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 what the administration has done to date. They propose a range of initiatives that include the purchase of troubled mortgage securities by a federal agency and the empowering of 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 the 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. Richard J. Durbin (D-Ill.), the author of a proposal that would allow bankruptcy judges to change the interest rates on subprime, adjustable and other nontraditional loans for homeowners facing foreclosure.

    The White House and Treasury Department officials took pains yesterday to communicate a broader message, aimed at Capitol Hill and Wall Street: The administration would oppose the use of tax dollars to rescue banks, investors and homebuyers who made foolish financial decisions. Instead, it 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 that 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 numerous 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 he is proposing a more limited plan than Durbin's.

    Other leading proposals by Democrats include expanding the Federal Housing Administration's capacity to buy distressed mortgage securities from Wall Street banks at extreme discounts and appropriating $4 billion to state and local governments for the redevelopment of homes in foreclosure.

    The most controversial, however, is Durbin's proposal, which would allow bankruptcy judges to cut the interest rates of housing loans to the prime rate plus a "reasonable" premium for homeowners who cannot afford their subprime mortgages or other nontraditional 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, AARP and credit unions. "It makes no sense whatsoever."

    The threat of a court-ordered change in interest rates would be enough incentive to persuade lenders to voluntarily renegotiate the terms of failing loans before a homeowner is forced to declare bankruptcy, Durbin 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."

    Home prices around the country have plummeted while the number of foreclosures has soared. One of every 10 homeowners now owes more on his home than it is worth. For many of these families, it is cheaper to walk away than to pay off the debt. Others are seeking help as they struggle with devastating increases in monthly payments on their adjustable-rate mortgages.

    Charmaine Perryman, 47, came home to an eviction notice taped to her front door in Dunellen, N.J., last fall. "It was like somebody flushed the toilet, everything went out of my life," the single mother said. "I thought, 'Now we're going to be homeless.' "

    Perryman had an adjustable-rate mortgage that had reset twice since 2003, rising from 7.5 percent to 11 percent. After she lost her job as a child-care provider, she could not make the $2,000 monthly payments on her $206,000 loan. Perryman was rescued by a church-based community development organization, which is buying her home from the bank. But the trauma was intense, she said.

    The crisis represents a major threat to the economy and is hurting even homeowners with good credit.

    Timothy MacKinnon, 32, a policy researcher from Highland Park, N.J., bought a $330,000 home last July with a conventional 30-year fixed mortgage. The value of his house has declined at least 10 percent since then.

    He blames people who took loans to buy homes beyond their means and drove up real estate prices, only to default and pull home values back down.

    "There's no good way to address this," he said. "I don't want to bail out bad behavior.... On the other hand, you can't let people lose their homes and put them on the street."

    --------

    Staff writer Neil Irwin contributed to this report.

    Go to Original

    Getting Real About the Rescue
    The New York Times | Editorial

    Wednesday 27 February 2008

    Some big banks are supporting new proposals to rescue homeowners who owe more on their mortgages than their houses are worth, but let's get one thing straight: the banks haven't been struck by a sudden urge to help the needy. Rather, by advocating bailouts, the lending industry is trying to head off a possible change in the law that would let troubled borrowers modify their mortgages in bankruptcy court - where lenders, not taxpayers, would be stuck with the losses.

    Congress must not kowtow to the lenders. It should insist that borrowers be given a chance to modify their mortgages under bankruptcy court protection before it even thinks of asking taxpayers to pick up the tab for the mortgage mess. Under current law, borrowers cannot rework the mortgages on primary homes in bankruptcy proceedings. Senate Democratic leaders are pushing a bill to let many at-risk homeowners do just that. The House Judiciary Committee has passed a similar measure. Republicans, who are balking, should get on board, or risk leaving their constituents without an effective way to save their homes.

    If the bankruptcy provision becomes law, as it should, lenders will have a powerful incentive - which they currently do not have - to modify troubled loans voluntarily. If they can't or won't come to new terms with borrowers, then they would run the risk that a bankruptcy court would do the modifying for them.

    So far, despite a lot of promises, the industry has been unable or unwilling to rework the junk loans of the bubble years in ways that come near addressing the enormity of the problem. In contrast, access to bankruptcy court would mean relief for some 600,000 homeowners - not by wiping out their debts, but by modifying the loan terms so borrowers can pay them off over time.

    Lenders object that by giving homeowners the right to modify their mortgages under court supervision, the bankruptcy amendment would raise the cost of mortgages for everyone, forever. That concern is surely overstated, but not entirely without merit. To address it and other industry worries, lawmakers have proposed constraints, such as limiting the bankruptcy relief to junk mortgages of the past few years.

    The bankruptcy amendment has another virtue: it could bolster a worthy rescue idea floated recently by the Treasury Department's Office of Thrift Supervision, one of the nation's bank regulators. The idea is that if lenders voluntarily agree to loan modifications, they would become entitled to a share of the house's appreciation, if any, when the house is ultimately sold.

    Like other Bush administration plans, this one suffers from its emphasis on voluntary cooperation, which has been shown to be inadequate. The bankruptcy amendment, however, would give lenders more incentive to go along, by providing a real downside to not acting voluntarily - losing control to a bankruptcy judge.

    In the end, taxpayer-funded bailout proposals may make sense, but only if other prudent measures have been exhausted. That has not happened yet. There are two good, complementary ideas on the table - the carrot for lenders offered up by the Office of Thrift Supervision, and the stick provided by the bankruptcy amendment. Congress and the Bush administration should move forward quickly on both of them.

    Go to Original

    Bush Vows to Veto a Mortgage Relief Bill
    By Edmund L. Andrews
    The New York Times

    Wednesday 27 February 2008

    Washington - President Bush sided with banks and mortgage lenders on Tuesday, threatening to veto a bill being offered by Senate Democrats that would give more bargaining power to homeowners who face foreclosure.

    Opening what is likely to be an intense political battle in the deepening mortgage crisis, the White House said it strongly opposed the bill, which would let bankruptcy court judges modify the terms of a mortgage as part of the restructuring of a debt in a bankruptcy filing.

    Supporters of the legislation say it could prevent as many as 600,000 home foreclosures affecting people who took out tickler or other complicated mortgages and now face steep increases in interest rates and monthly payments.

    Consumer and civil rights groups argue that the change in bankruptcy law would provide the surest way of helping families renegotiate mortgages that have been bundled into complex securities and sold to investors.

    But mortgage lenders, and the Wall Street firms that purchased the loans, have mounted a campaign against the bill, saying it would send a chilling message to investors and lead to higher borrowing costs in the future.

    "We're pulling out all the stops on this," said Stephen O'Connor, chief lobbyist for the Mortgage Bankers Association. "How will lenders and investors react to the added risk? They will likely charge a higher interest rate, likely charge more points on the mortgage and likely demand higher down payments."

    Unlike most other kinds of debt, including loans for vacation homes and rental properties, mortgages on a primary residence are outside the power of federal bankruptcy judges to change.

    In a statement issued Tuesday afternoon, the White House said the bill would "undermine existing contracts" and lead to tighter credit.

    "These and other provisions of the bankruptcy-related provisions in the bill would fundamentally alter the expectations of parties to hundreds of thousands of home purchases after the fact," it said. It also objected to provisions that would provide $4 billion for state and local governments to redevelop abandoned homes and provide money for homeowner counseling programs.

    The Bush administration has started a program it calls Hope Now, which encourages mortgage lenders to modify loans and sometimes freeze interest rates for people who face big increases in their monthly payments.

    But that program is voluntary, and the guidelines for providing relief are so narrow that it is expected to help only a tiny fraction of the 1.8 million subprime mortgage borrowers facing increases in these initial rates. Nor would the program provide help to people whose homes have declined in value and can no longer be sold for enough to pay off the mortgage.

    Supporters argue that the bill could prevent more than 600,000 foreclosures, which are often more costly to lenders than reductions in monthly payments, and would prevent a chain reaction of declines in home prices in neighborhoods surrounding the foreclosed homes.

    "Avoiding foreclosure can't be just a part of the proposal, it is the heart of the proposal," said Senator Richard J. Durbin, Democrat of Illinois and sponsor of the Senate measure.

    Senate Democrats have narrowed Mr. Durbin's original bill, tailoring it to people with particular kinds of problems and applying it to existing mortgages rather than to all mortgages in the future.

    For practical purposes, Democrats will need 60 votes before debate can begin. Democratic leaders had originally planned on taking up the matter Tuesday, but decided instead to begin debate on legislation to scale back military operations in Iraq.