Bush, Democrats square off on mortgage plans

Democrats have proposed additional measures including expanding limits on the total lending authority of Fannie Mae and Freddie Mac, along with an increase in the size of individual loans. The current cap for so-called “conforming” loans is $417,000; proponents of lifting the cap argue that home prices in many of the hardest-hit housing markets far exceed that amount.

Supporters of FHA reform also are pushing to raise the limits for FHA-insured loans, allowing borrowers to put no money down and expanding the insurance program to include riskier borrowers, who would pay higher premiums.

Some Democrats have also proposed spending government money to help nonprofit community groups that help refinance loans for people facing foreclosure.

Republicans have opposed FHA reforms and expanded lending authority for Fannie Mae and Freddie Mac on the grounds that these moves could increase the risk to taxpayers if FHA-loans go bad or the government-sponsored agencies get into financial trouble. But the ongoing problems in the mortgage market give Democrats a political advantage when they return to Capitol Hill to complete legislation.

And though the White House was attempting to get out in front of the issue Friday, Bush’s proposal don’t go far enough to head off more sweeping measures proposed by Democrats, according to Greg Valliere, chief strategist at the Stanford Washington Research Group.

“It’s a lose-lose for Bush,” he said. “He’s antagonized conservative activists who feel that he’s a least put his toe in the water for some kind of bailout, however modest. At the same time he certainly hasn’t gotten ahead of the Democrats. (Sen.) Hillary (Clinton) is talking about a $1 billion bailout fund, and (Senate Banking Committee Chairman) Chris Dodd is talking about forcing Freddie and Fannie to put more in their portfolios. So the Democrats are way ahead of Bush on this."

Still, it remains to be seen whether Congress can move quickly enough to prevent the mortgage meltdown from spreading to the wider economy, increasing the risk of an economic recession. Recent data suggest that isn’t happening — yet.

In the meantime, the financial markets are ultimately looking to the Federal Reserve to blunt the impact of the rise in foreclosures and the damage inflicted on the housing market and the economy.  That point was underscored Friday when Fed Chairman Ben Bernanke pledged to act “as needed” to bolster the economy — in a speech concluded just moments before Bush’s remarks.

"At the end of the day, the Fed has the most powerful of weapons out there,” said Diane Swonk, chief economist at Mesirow Financial. “It's the one that's the most poised to be able to use it quickly.”

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