With the Senate poised to take new action on the mortgage crisis and the House at work on far more sweeping proposals, the Bush White House is grudgingly giving ground on its ideological opposition to government intervention in the marketplace.
After months of reluctance to pressure lenders to write down the principal on troubled mortgages, the administration announced Wednesday that it is now willing to do just that.
Expanding an existing program, the Federal Housing Administration will allow borrowers who are behind on their payments and owe more on their homes than they are worth to refinance with a federally insured loan.
Given the more aggressive proposals in Congress, however, further concessions probably lie ahead. Indeed, for months, bank regulators and officials from the Treasury Department, along with the Federal Reserve, have been feeding ideas for large-scale government action to Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee.
But while critics blasted the White House plan, Frank welcomed it. He called it an acknowledgment that, with the housing industry continuing to decline and the nation heading toward more than 1 million home foreclosures by year’s end, direct government intervention was needed.
“I’m pleased to see that the Bush administration now agrees with that approach,” Frank said, declaring that the White House proposal followed the approach -- if not the scope -- of his own plans.
“There is a lot of common ground here,” Brian Montgomery, commissioner of the Federal Housing Administration, told Frank’s committee. The agency would implement the White House plan.
Elsewhere, the relatively narrow scope of the proposal and questions about how effectively it could be implemented drew fire.
Michael Barr, a University of Michigan law professor who had worked in the Treasury Department on housing and financial oversight, said the administration’s slowness to react comes from a laissez-faire approach to markets and regulation.
In effect, he said, the administration still sees the problem as a market correction when the consensus among regulators and lawmakers seems to be that it’s a market failure.
“I think there are these ideological blinders that limit their ability to act quickly and decisively. They are scared to use the government to make the world a better place,” Barr said.
Nick Retsinas, director of Harvard’s Joint Center for Housing Studies, called the Bush proposal “a classic case of the markets overreacting and the government underreacting,” with damaging results for the economy.
“You’ve had a dramatic increase in foreclosures, which has added to the overhang of unsold houses, which have driven home prices farther down. That means the housing slowdown is going to be longer and deeper than it really needed to be,” Retsinas said. “The administration is beginning to move a little faster, but they’re on a treadmill that’s going even faster in the opposite direction, so it’s not making much difference.”
Lenders said the administration’s proposal was a positive step toward providing more options to borrowers who had fallen behind on adjustable-rate mortgages.
“There’s no single solution to the housing crisis, and there’s definitely more that could be done,” said Steve O’Connor, senior vice president of government affairs for the Mortgage Bankers Assn. “But the proposal is another tool in the toolbox for consumers, and we want to be creating as many tools as possible.”
Some housing advocates took a harsher view.
The plan is “woefully insufficient” to keep foreclosure rates, now at 20,000 homes a week, from skyrocketing, said Josh Nassar, vice president of federal affairs at the Center for Responsible Lending.
“This is like using a garden hose on a five-alarm fire,” said John Taylor, president of the National Community Reinvestment Coalition. “In an environment where more than 2 million additional homeowners are facing foreclosure, an expansion of FHA Secure makes a nice press release, but it is immaterial relative to the magnitude of the crisis.”
At a Financial Services panel hearing Wednesday, the heads of three regulators -- the FDIC, the Office of Thrift Supervision and the Comptroller of the Currency -- expressed support for the crux of Frank’s proposal, which would use the FHA to insure restructured loans as long as lenders wrote down the principal.
“Overall, the Frank FHA proposal includes many positive features and addresses many of the FDIC’s fundamental principles,” said Chairwoman Sheila C. Bair of the Federal Deposit Insurance Corp. The approach, said Comptroller of the Currency John Dugan, is “prudent and appropriate.”
Meanwhile, at the White House, the only public comment came from spokeswoman Dana Perino in an early-morning, off-camera briefing, who said the changes at the FHA could be enacted by executive order, bypassing Congress.
“This is not a silver bullet that will solve all the problems in housing, but it will help some additional people stay in their homes, and that’s something the president wants to see,” Perino said.
The administration proposal would temporarily expand a program known as FHA Secure. Help would be offered to borrowers who have been making at least some payments but now face trouble because the value of their houses has dropped and their interest rates are scheduled to rise sharply, pushing monthly obligations beyond their ability to pay.
Lenders would have to agree to write down the principal.
The program would be voluntary, requiring lender and borrower to agree to the terms before the government would step in.
FHA commissioner Montgomery said more than 100,000 borrowers had already been served by the program, and that could go as high as 500,000 by the end of the year.
Frank said that only about 1,500 of the borrowers using FHA Secure had been in danger of foreclosure, and that the administration numbers conflated borrowers in several categories.
The housing plan being put together by Frank and his Senate counterpart, Banking Committee Chairman Christopher J. Dodd (D-Conn.), would give the FHA resources to insure about $300 billion in newly refinanced mortgages that met strict underwriting criteria, including that the owners live in the residence, lenders accept just 85% of the house’s depreciated value as their payoff, and a portion of any eventual profit go to repaying the government.
Reynolds reported from Washington, Hsu from Los Angeles. Times staff writer Peter G. Gosselin contributed to this report.