WASHINGTON – May 7, 2009 – Trying to curb home foreclosures, the Senate voted on Wednesday to make it easier for homeowners with risky credit to switch to a lower-cost mortgage backed by the government.
The bill, passed 91-5, also would give banks a break by reducing fees they must pay for the government to insure deposits.
While both steps put taxpayer money on the line, lawmakers say the legislation is needed to prevent the economy from getting worse.
“Given the size and scope of the struggles too many Nevadans and Americans endure, it will take more time before housing normalizes again,” said Senate Majority Leader Harry Reid, D-Nev. “But with this bill, we are working to hasten that day so that no family will ever accept losing its home as the way it is.”
Also on Wednesday, Democratic leaders in the House and Senate hashed out a plan to establish a $5 million, independent commission that would investigate the cause of the financial crisis and chart a path forward.
The Senate bill would expand an existing $300 billion program called “Hope for Homeowners,” which encourages lenders to write down an individual’s mortgage if the homeowner agrees to pay an insurance premium. The program, which is set to expire in 2011, is intended to swap out a homeowner’s high-interest rate for a 30-year fixed loan backed by the Federal Housing Administration.
So far, the program has been a dud.
When it was established last year, Congress envisioned helping some 400,000 troubled homeowners. But because eligibility requirements were so strict, one borrower has completed the refinancing process and only 51 more are in the works, according to statistics released last week.
The program also has been stymied by high fees, complex regulations and a requirement that banks volunteering to participate absorb large losses. The Obama administration supports easing restrictions.
Republicans also have swung behind the latest proposal to expand the program using $2 billion from the $700 billion Wall Street bailout fund. Sen. Richard Shelby of Alabama, the top Republican on the Banking Committee, co-sponsored the bill with panel chairman Sen. Chris Dodd, D-Conn.
Still, some Republicans warned that increasing the burden of the government to insure risky mortgages – even if it saves people from foreclosure – could backfire. Sen. David Vitter, R-La., who called the Federal Housing Administration a potential “ticking time bomb,” proposed letting the administration suspend any programs that threaten its solvency.
His effort was defeated 36-56.
Another issue is whether Hope for Homeowners will be enough to keep people in their homes, considering other voluntary efforts haven’t worked that well. According to a report released last month by federal regulators, fewer than half of the loan modifications made by lenders at the end of last year reduced payments by more than 10 percent.
Without a guaranteed steep discount, homeowners are still considered at risk of defaulting.
Instead, the Senate bill focuses on expanding eligibility. For example, the program currently bans participants who intentionally defaulted on a mortgage or other substantial debt. The Senate bill would narrow that prohibition to defaults within the last five years.
The government also could waive the requirement that the home be an individual’s primary residence. And, the bill allows for the homeowner to pay lower insurance premiums associated with the modified loan.
The bill also would permanently increase the borrowing authority for the Federal Deposit Insurance Corporation from $30 billion to $100 billion. Increasing the FDIC’s credit would allow the agency to reduce large new premiums it has begun charging banks to insure deposits.
Lawmakers also want to soothe investor fears by keeping an increase in government insurance for bank deposits. Under the Senate bill, deposits up to $250,000 would be insured by the Federal Deposit Insurance Corporation through 2013.
The House in March had approved a similar version of the bill; the two chambers will have to work out their differences before a final bill is sent to the president to sign.
Copyright © 2009 The Associated Press
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