Trouble for the Dodd-Frank mortgage rescue plan

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The L.A. Times reports this morning that the Dodd-Frank mortgage rescue plan is in trouble in Congress: ‘Mortgage industry intransigence, voter anger over possible government aid for speculators and economists’ fear that thousands of homeowners might just walk away from troubled loans are contributing to a potential stalemate.’

The Frank plan would ask lenders to write down troubled mortgages by roughly 15%, and then put federal guarantees behind the newer, cheaper mortgages.

The anti-bailout sentiment so widespread on housing bubble blogs appears to be a factor in the bill’s troubles: ‘’There is no sympathy for anything that smacks of bailout,’ said Allen Sinai, chief economist of Decision Economics Inc., who recently testified in favor of the Frank bill. ‘The outrage has shown up very quickly, and means that at this point the government can only go so far.’

There is also the question of how well the Dodd-Frank plan would work, and the risk that it would stick the government with a large pile of bad debt. A congressional report on the plan concluded it would not stop the sharp drop in housing prices, and raised other serious issues. For example, if the government is essentially paying 85 cents on the dollar for mortgages through new guarantees, the mortgage industry has strong incentive to game the system by selling only those mortgages that are worth less than 85 cents on the dollar. Only the weakest, least valuable mortgages would get rewritten. Relatedly, borrowers would have new incentive to manipulate their personal finances to qualify for the program -- if it means missing a few payments, some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage, the congressional report predicted.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com.