NYTimes.com
Bush and Fed Step Toward a Mortgage Rescue
Thursday March 6, 12:38 am ET
By EDMUND L. ANDREWS and VIKAS BAJAJ
WASHINGTON — However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders.Ben S. Bernanke, the Fed chairman, told a group of bankers in Florida on Tuesday that “more can and should be done” to help millions of people with mortgages that are often bigger than the value of their homes.
Though Mr. Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signaled his concern that market forces would not be enough to prevent a broader economic calamity.
He also suggested that the Federal Housing Administration expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.
And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about $1.5 trillion in mortgages.
Similarly, the Bush administration, despite its public opposition to bailouts, has set the stage for a bigger government role.
One month ago, President Bush signed an economic stimulus bill that greatly increased the size of loans the F.H.A. can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.
The move, which administration officials had previously opposed, increases the limits on F.H.A., Freddie Mac and Fannie Mae mortgages from $417,000 to as much as $729,750.
Historically, the F.H.A. and the mortgage companies have focused on conservative mortgages for people borrowing relatively modest sums. But they are now being encouraged to finance much bigger mortgages, in some cases to people who put almost no money down.
Last week, the administration went further by removing limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.
In theory, the change should not cost taxpayers. But because the companies are chartered by Congress, investors have assumed that Congress would bail them out if needed. Fannie Mae and Freddie Mac can borrow money more cheaply than private banks largely because of the assumed government backing.
The Fed has been offering its own resources to soften the credit squeeze that began when investors started to panic about subprime loans. In addition to sharply cutting interest rates, the Fed has lent more than $160 billion to banks since mid-December through a new program, the Term Auction Facility.
Under the program, banks have been able to borrow money for up to a month or so, pledging collateral that includes mortgage-backed securities, even if the securities are not tradable in today’s markets.
In Congress, Democratic lawmakers pounced on Mr. Bernanke’s comments in Orlando, Fla., to bolster their arguments for much costlier rescue plans.
“It is now clear that we will not be able to avert a more serious and prolonged economic slowdown if we don’t address the problem of increasing mortgage foreclosures,” Representative Barney Frank, chairman of the House Financial Services Committtee, said on Tuesday.
Mr. Frank, who praised the Fed chairman’s “willingness to work with us,” proposed legislation last week to allow the F.H.A. to insure up to $20 billion in troubled mortgages if the lenders first agree to forgive a big part of the original loan amounts.
But even without new legislation, the Federal Housing Administration has been active. It has insured 110,000 mortgage refinancings worth $15 billion since it started a program, F.H.A. Secure, in October. It is hard to know how many of the loans would have come to the agency because of the mortgage crisis, but officials estimate as many as 90 percent of the borrowers were previously in subprime loans.
The F.H.A. figures prominently in the proposals being put forth by regulators and lawmakers. The agency insures mortgage loans made by approved lenders.
A longstanding bill to modernize the program would lower the down payment needed for F.H.A. loans to 1.5 percent of a home’s value, from 3 percent. The bill would also let the agency price insurance based on each loan’s risks. The F.H.A. now charges everyone the same premium.
“We will not back loans that do not make sense and cost taxpayers money,” said D. J. Nordquist, a spokeswoman for the Department of Housing and Urban Development, which runs the F.H.A.
But skeptics worry that the plans to expand the scope of the F.H.A. will put taxpayers at risk. They note that home prices are likely to fall further. If the government moves to insure or buy mortgages now, it might help arrest the price decline — but only temporarily.
“The reality is, prices will fall; there is no way to keep them up,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington. “If we have the government get in, either as the owner of the debt or the guarantor of the debt, a lot of the decline will be shouldered by the taxpayer.”
Created during the Depression to support the mortgage market, the F.H.A. has played a critical role in the housing industry in the past, though in recent years it lost ground to subprime lenders.
Administration officials say the program was meant to step in during tumultuous times like these. They further note that its conservative underwriting standards will ensure that the F.H.A. program’s losses will be within its traditional range.
Congress and the Bush administration are also hoping to soften the mortgage debacle through Fannie Mae and Freddie Mac.
Even before President Bush signed legislation allowing the two government-sponsored companies to guarantee mortgages as big as $729,750 in high-cost markets, Fannie Mae had begun offering personal loans to some borrowers who were behind on their house payments. Known as HomeSaver Advance, the loans could help Fannie Mae keep mortgages current for borrowers who have a temporary setback.
The two companies are now trying to decide how to guarantee the bigger and potentially riskier mortgages. Both want to exclude “no-documentation” loans, but Congress authorized them to buy up big mortgages going back to last July — when a high percentage of such loans were approved without verification of the borrower’s income. As a result, company executives are debating whether to buy up at least some “no-doc” loans made last year.
“One could argue that these things are steps on the bailout continuum, although they are baby steps,” said Karen Weaver, head of securitization research at Deutsche Bank.
Democratic leaders in Congress are pushing for bolder action. The House speaker, Nancy Pelosi, will hold a closed meeting on Wednesday with some of the leading advocates for more extensive rescue measures.
Administration officials remain opposed, but some are at least discussing such ideas.
“Whether government intervention is necessary is something we should all be thinking about,” Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, said at a hearing of the Senate Banking Committee on Tuesday. “But I don’t think we are there yet.”
