Bush and Fed Step Toward a Mortgage Rescue
By EDMUND L. ANDREWS and VIKAS BAJAJ
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.
Lee ADDS: The credit reports of those being considered as in need should be reviewed at the TIME OF THEIR PURCHASE! If they were allowed to OVERBUY, the LENDER SHOULD BE PENALIZED! Bonuses paid to agents thatb secured unqualified buyers should be used as evidence of malfeasance!
