WASHINGTON – President Bush on Friday announced a set of modest proposals to deal with an alarming rise in mortgage defaults that have contributed to turbulent financial markets over recent weeks.
Housing analysts said it was highly likely the limited steps Bush outlined will be expanded in coming weeks by a Democrat-controlled Congress intent on responding to growing voter anxiety as up to 2 million homeowners worry about losing their homes.
Officials in the troubled housing industry said the important thing was that the administration had finally offered a proposal, a step they said should help calm global financial markets that have been on a rollercoaster ride in recent weeks as investors worried about a serious credit crunch.
"This is not a cure-all, but it is good to see something coming out of the White House," said David Seiders, chief economist for the National Association of Home Builders. "It is good for markets, both domestically and internationally, to see that the White House is facing the problem head on and at least starting to do something about it."
Bush's comments came the same day that Federal Reserve Chairman Ben Bernanke pledged to do everything necessary to protect the economy from the market turmoil. His comments to a Fed conference in Wyoming were seen as a strong signal that the central bank was moving closer to cutting a key interest rate, possibly as soon as its next meeting Sept. 18.
"Bernanke basically said that if problems in the financial market are hurting the economy, then the Fed will have to respond," said Mark Zandi, chief economist at Moody's Economy.com. "All the conditions are in place for the Fed to begin cutting interest rates."
Both Bernanke and Bush emphasized that their actions were not aimed at bailing out investors who had made bad decisions.
"It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford," Bush said in the Rose Garden. "Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government."
With Treasury Secretary Henry Paulson at his side, Bush insisted the economy was strong and could weather market turbulence. But he did not repeat his forecast of Aug. 9, that the economy was headed for a "soft landing." The next day, financial markets went into a significant swoon, sparked by the announcement from France's largest bank that it was halting redemptions in three large investment funds.
That disclosure sent shock waves through the global financial system because it indicated problems from rising defaults on subprime mortgages in the United States — mortgages packaged and sold to investors worldwide — were more far-reaching than realized.
Bush's proposals unveiled Friday are designed to help combat those defaults. They would make it easier for borrowers now holding adjustable rate mortgages that are resetting to higher monthly payments to refinance those loans using the resources of the Federal Housing Administration. The FHA is a Depression-era agency created to help low and moderate-income Americans afford homes.
Under the Bush proposal, which FHA officials said would take effect immediately, an estimated 60,000 homeowners who have fallen behind on payments because their mortgages have reset, would be able to refinance with FHA-insured loans. That marks a significant change because FHA does not now insure refinanced loans from borrowers who are currently delinquent.
"This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes," Bush said.
To qualify for the new program, being called FHA Secure, a borrower will have to prove the original loan was being repaid until it reset to a higher rate and they must have 3 percent equity in the home. The FHA does not supply the mortgage loan but it guarantees loans extended by banks and other lenders.
Currently, the maximum loan the FHA can guarantee in most states is $202,000 although that can rise to $362,000 in high-cost states such as California and New York. The administration is supporting FHA overhaul legislation to lift those limits.
FHA officials said another 20,000 people would be helped by a new type of risk-based pricing for its loan guarantees that will allow lower income mortgage holders to qualify by paying slightly higher rates. This change, which will require the FHA to change its rules, is expected to take effect early next year after a public comment period.
The 80,000 additional people who would qualify for FHA loan guarantees under the proposed changes Bush announced would still be a tiny portion of an estimated 2 million homeowners whose adjustable rate mortgages are scheduled to reset at higher rates by the end of 2008.
As another part of his mortgage package, Bush said he would support legislation currently pending in Congress that would temporarily change tax law to let homeowners avoid paying taxes on forgiven debt in loans being restructured by financial institutions. Sen. Debbie Stabenow, a Democrat from Michigan, a state particularly hardhit by foreclosures because of layoffs in the auto industry, is sponsoring that legislation.
Bush's proposals follow a number of measures already introduced in Congress to deal with the mortgage lending crisis. Many Democrats said while they welcomed Bush's ideas, they felt they did not go far enough and should be modified to help more people.
"These are welcome steps, but the president's proposal does not go far enough. I have called for a plan that will help far more struggling borrowers avoid foreclosure," said Sen. Barach Obama of Illinois and a Democratic presidential candidate.
Sen. Christopher Dodd, another Democratic presidential candidate and chairman of the Senate Banking Committee, said, "For too long this president has sat on his hands as families were losing their homes."
Many Democrats said the administration needs to go further by supporting their proposals to lift the current cap on how many home loans mortgage giants Fannie Mae and Freddie Mac can hold in their portfolios and by lifting the current cap on so-called jumbo loans that Fannie and Freddie would be able to purchase.
Sen. Charles Schumer, D-N.Y., said he believed Bush's announcement Friday represented a major ideological shift for the administration, which has generally favored free-market solutions to problems rather than increased government involvement.
"The president has gotten out of his ideological straitjacket and seen that in times of crisis, one of the jobs of government is to help," Schumer told reporters at a Capitol Hill news conference.
Bush also urged Congress to modernize and improve the FHA so more homeowners could qualify for the mortgage insurance provided by the agency, saying, "I look forward to signing a bill as quickly as possible." Last year the House passed legislation to modernize FHA, but Congress has not yet sent a bill to the White House.