Bush to propose aid to mortgage holders

President Bush today plans to outline a number of proposals to stem the tide of mortgage defaults and help people hold on to their homes, a senior administration official said Thursday.

The program is the first detailed administration response to the housing-sector woes that have roiled financial markets worldwide since June, amid surging home loan delinquencies.

Included in the plan, according to the official, will be a proposal to expand the Federal Housing Administration’s ability to insure loans for people who have fallen behind on their payments and could be helped by refinancing.

The president also wants to raise the limit on the insurance premiums that the FHA can charge home buyers. That could allow the agency to insure a greater number of loans to high-risk borrowers.

In addition, Bush will propose temporarily suspending an Internal Revenue Service rule that makes a homeowner liable for taxes on any amount of mortgage debt that is forgiven by the lender, said the official, who requested anonymity because the president’s program hadn’t been formally unveiled.

A suspension of the debt-forgiveness tax could help people who are hoping to work out a reduction in their loan balance -- and payments -- as a way of avoiding foreclosure.

It’s unclear how many struggling homeowners might be helped by the White House’s program, particularly in high-priced housing markets like California. Many people who took out adjustable-rate loans in recent years at low “teaser” rates and now face sharp jumps in their payments, may be unable to afford any new market-rate loan, even with government insurance, experts say.

Still, the housing debacle -- and the prospect of perhaps millions of Americans facing foreclosure -- has become a major political issue in Washington, with many Democrats demanding federal involvement to try to limit the pain.

The turmoil in financial markets this summer has added urgency to the situation. Rising home loan delinquencies have caused investors to flee mortgage-backed bonds, fearing huge losses on those securities.

That has fueled a general aversion to risk-taking that has caused many banks and investors to pull back from lending money, even to higher-quality corporate borrowers.

The Federal Reserve on Aug. 17 took the unusual step of cutting the rate at which it lends to banks. The Fed also encouraged banks to borrow to keep credit flowing in the financial system. But the move has met with limited success, and credit markets around the world remain on edge.

With that backdrop, the White House has faced increasing pressure to respond.

Bush, who has previously sought Congress’ approval to give the Federal Housing Administration more flexibility, apparently plans to make the agency the centerpiece of his action plan.

The FHA doesn’t make loans but rather insures them, which means lenders of those mortgages can charge lower rates to borrowers than they otherwise might.

But the FHA currently can’t insure loans larger than $362,790, which severely limits use of the program in high-priced states such as California. Bush wants to raise that limit to $417,000.

Expanding the FHA’s insurance powers “would empower the [agency] to reach more families that need help -- those with low incomes, blemished credit records or little savings -- and offer more options to homeowners looking to refinance their existing mortgage,” the administration official said.

Many of the homeowners who bought or refinanced houses in the last few years had limited financial means, and were only able to borrow via so-called sub-prime loans.

Those borrowers have been falling behind on their payments at a rate that has stunned financial markets, raising the prospect of a massive housing bust that could drag down the economy as a whole.

In particular, the administration official said, the goal of the proposals Bush will announce is to offer a lifeline to some of the estimated 2 million homeowners who have adjustable-rate mortgages that will adjust in the next few years or so, and who may be able to save their homes by refinancing.

Bush will direct Treasury Secretary Henry M. Paulson Jr. and Housing and Urban Development Secretary Alphonso R. Jackson to “work together on an initiative to help troubled mortgage holders get the services and products they need to prevent them from falling into default,” the official said.

As part of that mission, he said, Paulson and Jackson would be expected to work with mortgage-finance giants Fannie Mae and Freddie Mac, government-chartered companies that buy home loans from lenders. The companies have expressed interest in devising new types of loans to help struggling borrowers refinance.

But the White House has said it continues to oppose raising the ceiling on the total amount of loans Fannie Mae and Freddie Mac can hold in their already huge portfolios.

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tom.petruno@latimes.com