Congress wants to act on economy, but how?

updated 11:27 a.m. ET March 24, 2008

WASHINGTON - Faced with rising economic anxiety and the high-profile rescue of a major investment bank, lawmakers are considering sweeping changes to the financial system and a massive effort to buy up troubled home loans.

While they debate the best thing to do, frustrations are building that Congress, which is halfway through a two-week recess, and the Bush administration haven't done enough to combat the economic impact of falling home prices, banks' unwillingness to lend freely and a seized-up market for mortgage-linked investments.

"These people have to get past stepping on each other's toes and kicking each other in the shins and get out and start providing some leadership," said James Cox, a Duke University law professor and securities law expert.

Housing industry groups are preparing to lobby hard for help when Congress returns from recess March 31. Arguing that the stimulus package signed by President Bush last month didn't do enough to aid the housing sector, builders want a second boost — including a new tax credit for people who buy homes.

"The housing economy has been the root cause of this recession," said Jerry Howard, chief executive of the National Association of Home Builders. "Unless you do something to shore up the housing markets, we're not going to be able to get out of this situation."

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Conn., who heads the Senate Banking Committee, are crafting a plan in which the Federal Housing Administration would guarantee up to $300 billion in refinanced mortgages in exchange for agreements from investors to take a loss on those loans.

That proposal is getting a warm reception from the mortgage industry, which desperately seeks a way to set a value for mortgage securities that have become nearly impossible to sell. Fixing that problem is crucial, said Francis Creighton, vice president for legislative affairs at the Mortgage Bankers Association.

"When you don't know where the bottom (of the market) is, you just hold off and you invest in something else," he said.

Regulators are taking urgent steps to shore up the market for mortgage investments. The Federal Reserve earlier this month allowed investment firms to borrow up to $200 billion in safe Treasury securities and put up mortgage-backed securities as collateral. On Monday, regulators authorized the 12 regional banks in the Federal Home Loan Bank system to increase purchases of Fannie Mae and Freddie Mac mortgage securities by $100 billion.

Democrats and Republicans did compromise last month on an economic stimulus package that sends checks of up to $1,200 to 130 million households later this year.

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