Bush Offers Relief for Some on Home Loans

Doug Mills/The New York Times

President Bush, with Treasury Secretary Henry M. Paulson, right, and Secretary of HUD, Alphonso R. Jackson, announced a plan to help prevent foreclosures for Americans with poor credit.

WASHINGTON, Aug. 31 — President Bush, in his first response to families hit by the subprime mortgage crisis, announced several steps today to help Americans who have credit problems meet the rising cost of their housing loans.

In remarks this morning at the White House, Mr. Bush said he would work to “modernize and improve” the Federal Housing Administration “by lowering down payment requirements, by increasing loan limits, and providing more flexibility in pricing.”

Administration officials said in advance of Mr. Bush’s appearance that the goal would be to change its federal mortgage insurance program in a way that would let an additional 80,000 homeowners with spotty credit records sign up, beyond the 160,000 likely to use it this year and next.

“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,” Mr. Bush said. “Yet there are many American homeowners who can get through this difficult time with a little flexibility from their lenders or little help from their government.”

The administration is offering his plan, which will include what one official called jawboning of lenders to persuade them not to foreclose on some borrowers, at a time of growing attacks on Mr. Bush from Democrats who say he has remained on the sidelines amid increasing anxiety over whether millions of Americans could end up losing their homes. Other elements of the plan would need legislative action, requiring Mr. Bush to win over the Democratic leadership in Congress.

He called for Congress to act quickly.

“The recent disturbances in the subprime mortgage industry are modest — they’re modest in relation to the size of our economy,” Mr. Bush said this morning. “But if your family is — if your family’s one of those having trouble making the monthly payments, this problem doesn’t seem modest at all.”

The main objective of the package, one senior official said, is not to affect the stock markets but to help low-income homeowners, many of them concentrated in certain neighborhoods in several distressed areas of the country, such as Ohio and Michigan.

“The primary focus is to help individuals who have an opportunity to stay in their homes to stay in their homes,” this official said. “The subprime mortgage situation is having a crushing effect on a lot of communities right now.”

Administration officials, who asked not to be identified, briefed a handful of news organizations on the proposals on Thursday evening. Despite the assertion that affecting the markets is not the goal, one administration official said concern about Wall Street’s reaction did affect the timing of the briefing. He said there was a fear that if the White House announced in the morning that Mr. Bush would be making an announcement on housing, there could be confusion as buyers and sellers of mortgage securities guessed what the announcement would be.

But secondarily, this official said, helping homeowners keep their homes and refinance or renegotiate the terms of the mortgages could have a stabilizing effect on the financial institutions that have these mortgages in their portfolios, and help them write down the value of the mortgages or sell them off at a loss.

“You can’t solve the problems in the financial markets unless you can make some progress on the retail end of it,” said this official. “This is also a step to get banks to start loaning again.”

Another factor in the decision to disclose details ahead of time was that Ben S. Bernanke, the chairman of the Federal Reserve, was planning to give a speech on housing this morning at the Fed’s annual conference in Jackson Hole, Wyo., and that speculation about his comments would also unsettle the markets.

As they put together the proposals, top administration officials consulted with financial institutions, some members of Congress, housing counseling groups, academic specialists, and also with Mr. Bernanke.

Several other steps the administration plans to announce involve seeking legislative changes. Mr. Bush, for example, is expected to endorse proposals backed by Democrats in Congress that would raise the ceiling on the amount of a mortgage that can be refinanced with federal insurance.

He is also expected to support legislation that would provide tax breaks to homeowners whose mortgage debt is forgiven, in whole or in part, by lenders. The federal government currently collects taxes on the amount of a loan that is forgiven.

Democratic presidential candidates and Congressional leaders have hammered the administration in recent weeks, charging Mr. Bush with indifference to the plight of an estimated two million homeowners whose mortgage costs are expected to go up in the next year and a half.

These two million mortgages, all held by homeowners with credit problems and with homes that are declining in value, are valued at $500 billion to $600 billion, administration officials said. The total value of American mortgages is about $10 trillion.

Many of these homeowners are lower-income families caught in the squeeze of variable-rate mortgages whose cost is expected to soar in coming weeks and months. With their home values declining, many are considered likely to default, possibly adding to the global turmoil in the financial markets.

The administration officials who briefed reporters sought to underscore Mr. Bush’s willingness to work with Democrats, an unusual display of bipartisanship from an administration that has tangled with Democrats on many economic and budget issues. The administration’s legislative proposals are likely to be similar to bills that Congressional Democrats have proposed, but there is still room for considerable argument over details. In general, the administration wants home buyers to pay for any measure that might help them, and Democrats want measures that provide extra help to people with low or moderate incomes.

But administration officials said they would continue to oppose one measure that Democrats strongly endorse: an increase in the total dollar value of mortgages that Fannie Mae and Freddie Mac, the government-sponsored housing-finance companies, can hold in their investment portfolios.

Until now, Mr. Bush and his top economic advisers, particularly Treasury Secretary Henry M. Paulson Jr., have focused on the broad prospects of the American and global economies and the disarray in financial markets.

Two weeks ago, when asked about the problems of mortgage holders, Mr. Bush said that many Americans struggling with their mortgages had failed to read the fine print on the loans.

But some in the administration and some Republicans are also concerned that there has not been enough talk from Mr. Bush about lower-income homeowners. These Republicans have said the administration’s response so far is reminiscent of its initial delays in relief after Hurricane Katrina two years ago.

The plans to be outlined by Mr. Bush are to be in the form of administrative actions taken unilaterally and proposals for enactment by Congress, many of them already in various bills sponsored by leading Democrats.

Among the Democrats with such proposals are Representative Barney Frank of Massachusetts, who is chairman of the House Financial Services Committee; Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee; and Senator Charles E. Schumer of New York, chairman of the Joint Economic Committee.

One senior official said, however, that the administration would encourage Fannie Mae and Freddie Mac to help low-income holders of subprime mortgages refinance or renegotiate the loans, rather than lifting the companies’ investment limits.

Mr. Frank has said that the administration is ideologically opposed to letting the two mortgage agencies play a role in assisting homeowners in the current crisis, but the administration official said that was a misconception.

Mr. Bush also plans to enlist Mr. Paulson and Alphonso R. Jackson, the secretary of housing and urban development, to consider regulating home-lending practices in the future to crack down on predatory practices. In addition, they are to study the role of credit-rating agencies, some of which have been accused of giving unrealistically positive ratings to packages of mortgages, which were then acquired by hedge funds and other institutions.

One official said the administration’s proposals would not include a bailout of institutions that bought mortgages that have plummeted in value.

“We are not using the b-word,” he said, referring to the talk of bailing out lenders.

One economist said the efforts seem well intentioned. The F.H.A. can help provide another option to homeowners who need to refinance, and the government should do what it can to encourage mortgage companies to modify loans, rather than foreclosing on them.

The administration could also help homeowners in higher-priced markets by temporarily raising the $417,000 limit on loans that Fannie Mae and Freddie Mac can buy from mortgage companies, said the economist, Thomas Davidoff, an assistant professor at the Haas School of Business at the University of California, Berkeley.

But he noted all the efforts would likely only have a limited impact, given the number of loans resetting to higher interest rates in the coming months.

“This is helpful. But you had millions of people taking loans they should not have been taking, and investors lending money at too low interest rates,” Mr. Davidoff said. “Nothing is going to make those bad decisions go away.”

Vikas Bajaj contributed reporting from San Francisco.

Copyright 2007 The New York Times Company. Reprinted from The New York Times, National, of Saturday, September 1, 2007.