Washington's leaders have been pushing many policy buttons to stem the worsening housing and credit crisis. They've yet to find the off button, however, and that's prompting a search for more-aggressive solutions.
This week's decision by Citigroup Inc. to bail out seven investment entities and bring $49 billion in assets onto its balance sheet effectively killed one of the centerpieces of the Bush administration's approach. Treasury Secretary Henry Paulson has pushed a giant rescue plan for off-the-books funds saddled with mortgage-backed debt, but banks have mostly done the painful work themselves.
Some other policy moves are getting under way, including a plan to freeze interest rates for some subprime mortgage borrowers and the Federal Reserve's move to offer banks special funding at lower-than-usual rates so they can lend more. The Fed has cut its key short-term rate by a full percentage point since August, and markets expect it to continue.
Still, if those steps fail to calm homeowners and markets, as some investors expect, debate is likely to grow about what levers remain. Some with an interventionist bent are raising proposals amounting to federal bailouts for homeowners facing foreclosure and the revival of New Deal-era programs. Earlier this month, the Mortgage Bankers Association said home foreclosures in the third quarter hit their highest rate since at least 1972.
"There needs to be a bias towards activism," said Lawrence Summers, secretary of the Treasury under President Clinton, in an interview. "Policy has been behind the curve for months now. The dangers of doing too little are much greater than the dangers of doing too much in this context."
Others on the conservative or libertarian side say the best move may be to do nothing. They contend the government must be careful about anything that props up home prices because it would delay the point at which investors -- in both real estate and mortgage-backed securities -- believe prices have touched bottom.
"The financial erosion will come to an end when the prices of homes and equity in homes stabilize, probably not before," said former Federal Reserve Chairman Alan Greenspan in an interview.
This past week, the Center for American Progress, a liberal think tank, proposed that the government buy some mortgage-backed securities and create a new agency, the Family Foreclosure Rescue Corp. It would issue new, more affordable fixed-rate mortgages for those facing foreclosure whose homes are worth less than what they owe.
"There will be a louder discussion about do variations on this theme make sense, and could you pull it off?" says Ellen Seidman, a former economic adviser in the Clinton administration now at the New America Foundation.
Alex Pollock, a resident fellow at the American Enterprise Institute, a market-oriented Washington think tank, says Congress and the White House should review the history of a defunct federal agency known as the Home Owners' Loan Corp., created in 1933 when thousands of banks were failing and millions of Americans couldn't pay their mortgages.
The agency acquired distressed mortgages from banks at a discount and refinanced them on easier terms. It was wound up in 1951 and returned a small surplus to the U.S. Treasury, Mr. Pollock says. He says it's unclear whether the U.S. eventually might need another such agency but not too early to start work on contingency plans.
Hundreds of thousands of homeowners are stuck with subprime mortgages that are about to get more expensive to maintain as rates automatically jump. Rising foreclosures put further pressure on home prices, sucking into the maelstrom homeowners who had hoped to avoid the mess. The way these mortgages were packaged and sold to investors has spread the contagion to Wall Street, where banks have already announced tens of billions of dollars in losses.
One question is what exactly Washington policy makers should be trying to prevent. Does every homeowner facing foreclosure deserve help, or just some of them -- and how should the deserving be identified? At what point do banks' problems raising funds become a public concern?
The plan recently announced by the mortgage industry, with Bush administration support, could freeze interest rates on hundreds of thousands of troubled subprime mortgages that are set for rate increases over the next two years. But it won't help everyone. Borrowers can't have defaulted already. Some critics say the plan amounts to a rescue for the irresponsible, while others, particularly Democrats, say it won't fend off foreclosure for enough people.
A Treasury spokeswoman declined to discuss what options the administration is now considering.
The Senate Friday voted 93-1 to approve long-delayed legislation to expand the role of the Federal Housing Administration, which insures home mortgages against the risk of default. The legislation, supported by the White House, would raise limits on the size of mortgages the FHA can insure. The current limit of $362,790 would rise to $417,000. The House has already passed a similar bill, and the two versions must now be reconciled.
"Everyone I talk to...is predicting an extremely difficult housing year in 2008," said Sen. Jack Reed, a Rhode Island Democrat, after the vote. "If we don't act promptly in many different ways, and this is one, I think we will be rightfully criticized."
Pending on Capitol Hill are bills to make it easier for bankruptcy judges to help borrowers remain in their homes, tighten regulation of mortgage lenders and brokers, and give government-sponsored mortgage investors Fannie Mae and Freddie Mac more scope to finance home loans.
The political pressure for action is likely to intensify as the 2008 elections approach, and Fannie and Freddie are likely to get more attention. Though they are owned by private shareholders, the companies were chartered by Congress, and federal regulators have a big influence over them. Fannie and Freddie already are playing a much bigger role in financing mortgages because other investors, scared off by soaring defaults and falling home prices, are retreating.
But Fannie and Freddie are limited in how much more they can do. Heavy losses in the third quarter, and expectations of more red ink to come, forced them in recent weeks to scramble to raise a combined $13 billion in fresh capital by selling preferred shares. By law, they can't own or guarantee single-family mortgages that exceed the "conforming loan" limit, currently $417,000 in the continental U.S.
Their main regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, has placed a temporary limit on their holdings until they can redress problems with accounting and risk controls.
If Fannie and Freddie report results for 2007 on a timely basis in February, Ofheo will seriously consider removing the caps, which would allow them to buy more mortgages, James Lockhart, director of the regulatory agency, said in an interview. After that, Ofheo also will look at whether it can eliminate or scale back the current requirement that they hold 30% more capital than usual.
Sen. Charles Schumer, a New York Democrat, says Fannie and Freddie should be given marching orders to devote more money to refinancing subprime loans, something he has proposed in legislation that is currently stalled. "They're needed at this moment," he said in an interview.
While such steps might help homeowners, they won't directly address the reluctance of financial institutions to lend to one another and the sudden hesitation among investors to hold risky assets.
Last Wednesday the Fed unveiled, in concert with four other central banks, a new method by which it would "auction" low-rate loans to banks totaling up to $40 billion. Options for the future include expanding the auctions and lowering interest rates rapidly. But Fed officials, worried about rising inflation, believe markets overestimate how far the central bank can go.
--Michael R. Crittenden contributed to this article.
From WSJ on-line
No comments:
Post a Comment