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Bush and Lawmakers Battle Over Housing Bailout

April 11, 2008

President Bush has decided to scramble for his own federal aid project for homeowners. At the end of the eleventh hour, Bush has decided to head off foreclosures, clashing with both parties who want the government to step in with a broad housing rescue.

Bush plans to use an existing Federal Housing Administration program to enable more low and moderate income borrowers to refinance into government-insured mortgages that they can afford.

The Democrats have been pushing to have the FHA back $400 billion in restructured loans for distressed borrowers if lenders were willing to take a substantial loss on mortgages. The idea is that bankers owe government and taxpayers something for bailing them out of their fiscal crisis.

The “if proviso” appears to need plenty of definition. Clearly, the pressure is on for bankers to take some losses, but most likely taxpayers will absorb most of the losses through the FHA.

President Bush doesn’t agree. His plan is designed to reach about 100,000 borrowers and would protect lenders from taking large losses. He intends to expand a program known as FHASecure, which is designed to help homeowners with some equity in their homes. The borrowers would need to current with house payments. The new FHA is designed to help the borrower avoid hefty rate hikes built into old loans into a government-insured fixed-rate loan.

President Bush is confident enough to have issued a press release advertising his future provision. Ron Withers, a Florida mortgage broker consideredmy thoughts that the FHASecure initiative was woefully inadequate from a pre-emptive approach. To me it sounds somewhat ridiculous that a program would not have some provisions to head off this problem….before it became a problem.”

Democrats are bitter. Wary of the prospect of inaction, they have worked to develop an assistance plan for subprime borrowers. They accuse President Bush of stonewalling and attempting to subvert their plan at the last moment.

Democrats say that Bush’s plan does little to help struggling homeowners that are truly hard-pressed. Democrats intend to allow refinancing even if homeowners are behind on payments.

The current administration claims that Barney Frank’s Democratic bill would put the government at risk while forcing lenders and investors to take losses. Unfortunately, the president’s plan ignores the fact that when foreclosures occur, the lenders and investors already take losses of up to 25%. Lower home prices and a weak market would magnify those losses.

The administration rejects the idea of allowing lenders to sell distressed mortgages through the government. They feel this action would put a large number of non-performing loans on the shoulders of taxpayers.

Democrats want to provide loans and grants for rehabilitation and purchasing foreclosed homes. Bush wants to stick closer to his yearly budget and called the Democratic plan “a costly bailout for lenders and speculators.”

Some lawmakers in both parties are cool to the Senate bill, stating that the bill would do little to help people staring foreclosure in the face and would fail to bolster the shaky housing market. Meanwhile, Democrats seek to combine the Senate bill with a bill that would manage tax breaks for first-time home buyers in low-income rental housing.

Clearly, lawmakers have lost sight of what needs to really be accomplished: a comprehensive plan that actually does what it claims to do without pork-barrel spending.

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