Bush, Democrats square off on mortgage plans

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

The measures President Bush outlined Friday for dealing with the ailing mortgage market are just the beginning. When congressional Democrats return from their summer break, the list of proposals addressing how far government should go to help borrowers who got in over their heads will likely get longer — and the debate about how to pay for it will likely get louder.

Long before the mortgage market melted down this summer — spreading investor anxiety throughout the global credit markets — Congress and the White House already were locked in a debate about reforms that would expand the government’s role in it.

Now, as foreclosures and late payments have spiked, these reforms have taken on a new urgency. Some two million homeowners with adjustable mortgages will face higher rates — and payments — over the next year. Shifting market conditions have left many of them with more debt than they can carry — but they are unable to refinance or sell their homes without taking a big financial hit due to falling home prices and steep prepayment penalties.

The Federal Housing Administration set up after the Depression guarantees mortgage payments for some borrowers. Fannie Mae and Freddie Mac bundle loans that conform to lending standards and re-sell them to investors. While not directly backed by the government, these loans are considered less risky for investors, which helps lower the rates borrowers pay.

Bush stopped short of offering direct aid to mortgage borrowers facing default or foreclosures. Instead, Bush proposed that creditworthy borrowers — some of whom are now stuck in loans that are re-setting to higher monthly payments they can’t afford — be allowed to refinance with an FHA-backed loan.

The White House estimates that roughly 80,000 homeowners fall into that category — a relatively small portion of borrowers who are having trouble paying their loans.

CNBC video Bush official on mortgage mess Aug. 31: HUD Secretary Alphonso Jackson discusses a plan to ease the subprime mortgage crisis. CNBC

Bush also proposed that borrowers who are able to negotiate a new loan with a lender who forgives part of the debt should be exempt from taxes on the difference. Currently, the tax code treats forgiven loans as income and subject to tax. Democrats have proposed a similar measure.

But Democrats also have made proposals that go beyond what Bush announced Friday, aiming to help repair the damage done by years of reckless lending, outright fraud and borrowers taking on more debt than they could afford. More than 100 lenders have been forced to close their doors, and the mortgage market has tightened quickly, making it much harder for some home buyers — especially those just starting out — to get a loan.

“At the moment the problem is that there is no credit or very high cost credit for about half the mortgage market,” said Mark Zandi, chief economist at Moody's Economy.com.

Bush made clear that he doesn’t support spending tax dollars to try to expand the pool of money available to borrowers.

“The government’s got a role to play, but it is limited,” Bush said. “A federal bailout of lenders would only encourage a recurrence of the problem.”

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