Mortgage relief proposals gain momentum

John W. Schoen Senior Producer • Profile • E-mail

Call it what you will — a bailout or a loan. The Federal Reserve's actions to save Bear Stearns from collapse have intensified debate over whether the government also needs to do more to prevent millions of homeowners from losing their homes.

So far, the White House has opposed the idea of using taxpayer dollars to help homeowners struggling under mortgage debt.

But with the mortgage meltdown threatening to grow into a wider economic calamity, plans for a more aggressive approach are beginning to take shape on Capitol Hill. Under some of the proposals the government would get some of the future appreciation of a home in turn for its role in refinancing.

“The problem at its heart is one of stopping the decline in home prices,” said Bill Gross, chief investment officer at PIMCO, the giant bond fund manager. "We have an asset deflation of significant proportions under way here. And to let a home in Des Moines drop to 80 cents on the dollar through foreclosure or otherwise is to mark down every other house on that block, the city and the country.”

To date, the government’s primary response to the rising tide of foreclosures has been the Hope Now Alliance, a voluntary consortium of lenders and community groups set up to streamline communication between borrowers and their lenders. Though Hope Now officials say hundreds of thousands of homeowners have been helped, many have been left facing bankruptcy or foreclosure as their loans adjust upward to monthly payments they can’t afford.

Uncertainty over future losses from distressed loans played a major part in this week's collapse of Bear Stearns. If unchecked, ongoing problems in the mortgage market threaten to cause even wider damage to the housing market and the economy, said  Alan Blinder, a Princeton University economist and former Fed vice chairman, who is working on a foreclosure relief plan of this own.

“This problem that started in the mortgage market has now spread over the months that have elapsed from August to now into — not quite every nook and cranny of the credit markets — but most of them,” he said. “And it’s threatening to begin moving like a blob into all the other markets. If and as those markets stop functioning well, the economy gets seriously imperiled. And that goes to most people’s jobs and incomes. So this is really about preventing a bad situation from getting a lot worse.”

All of which has helped blunt some of the opposition in Congress and the White House to a wider government response, said John Taylor, president of the National Community Reinvestment Coalition, which has drafted a plan to head off defaults and foreclosures called Help Now.

“I think (opponents) are recognizing that there needs a more aggressive approach if they’re going to revive this worsening economy,” he said.

The pipeline for new mortgages has been battered by losses already booked by investors who bought securities backed by now-distressed loans. Until those investors regain confidence in the quality of new loans, funds for refinancing or new home purchases will be remain costly and difficult to find.

“We're in a problem where investors are on strike, having bought what they shouldn't have bought,” said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. “And now they don't want to buy what they should buy.”

Frank has proposed legislation to end that "investor strike" by authorizing the Federal Housing Administration to provide up to $300 billion in loan guarantees for new mortgages to replace old loans gone bad. Sen. Christopher Dodd, D-Conn., who heads the Senate Banking Committee, introduced the Hope for Homeowners Act.

While they have some significant differences, the plans share some common ground. The general idea would be for the government to identify problem loans and ask the investors who hold them to book a loss that, in many cases, they’ve already taken.

The government would then sell the loans back into the credit markets at a lower price, while offering new, more affordable loans to the borrowers. The new loans would reflect the true, current value of the home and give homeowners a chance to begin building equity again.

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