Bush targets mortgages

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 Democratic-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. The comments from Bernanke and Bush bolstered spirits on Wall Street, where the Dow Jones industrial average finished another erratic week with a gain of 119.01 points on Friday, to close at 13,357.74.

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. Bush’s proposals would make it easier for borrowers 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.

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 an additional 20,000 people would be helped by a new type of risk-based pricing for its loan guarantees that will let lower income mortgage holders qualify by paying slightly higher premiums. 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. Of those 2 million loans that will reset, FHA estimates that 500,000 could go into foreclosure. The new programs plus current FHA programs could help about half of those 500,000 loans be refinanced, officials said.

As another part of his mortgage package, Bush said he would support legislation 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.