U.S. Representative Barney Frank plans to introduce legislation next week that would help prevent home foreclosures by allowing the government to buy mortgages for struggling borrowers and insure them against default.
The bill would direct a federal agency, such as the Federal Housing Administration, to buy refinanced mortgages in cases where lenders forgive some of the principal to help borrowers repay, Frank said today at a news conference in Washington.
``There is an emerging consensus that we are not going to be able to deal with this economic slowdown, we're not going to be able to keep it from getting longer and deeper, if we don't deal with the bad mortgages,'' Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, told reporters after a meeting with House Speaker Nancy Pelosi, economists and former bank regulators.
Frank's proposal puts him at odds with the White House and Treasury Secretary Henry Paulson over the government's role in efforts to stem foreclosures amid the biggest housing slump in a quarter-century. Paulson, who opposes plans requiring taxpayer money, backs an industry-led approach in which companies agree to change loan terms for struggling borrowers.
Support is building among policy makers, including Federal Reserve Chairman Ben S. Bernanke, for going beyond voluntary modifications and urging lenders to write down the principal on loans to keep homeowners from abandoning their property.
Bernanke called on lenders yesterday to forgive parts of mortgages held by homeowners facing default. He also endorsed an Office of Thrift Supervision plan to refinance loans for borrowers whose home debt exceeds their property values.
That plan calls for loan-servicing companies to accept a loss for the difference between the old and new loans, with the possibility of recouping the amount once the home is sold.
The ``private-sector effort'' is ``the right program,'' Paulson said yesterday in a speech in Arlington, Virginia. He said last week proposals such as Frank's ``do more harm than good.''
Last year, Paulson urged the formation of the Hope Now alliance, a group of mortgage lenders, loan-servicing companies and counselors whose goal is to reach borrowers at risk of foreclosure and help them modify their loans.
``What we have is a consensus that Paulson's plan was well intentioned,'' Frank said. ``But you're not going to be able to make the dent you need one at a time.''
Frank said his plan, which would apply only to owner-occupied homes, would initially be funded with $10 billion to $12 billion. In the long run, it may not cost the government ``very much at all'' since most of it may be repaid ``if this works well,'' Frank said.
Congressional Republicans oppose Frank's plan.
``Not everyone who is in foreclosure was a victim, and who he will end up victimizing with a massive taxpayer bailout'' are borrowers who used their credit responsibly, said Representative Jeb Hensarling, a Texas Republican and a member of the House Financial Services Committee.