WASHINGTON -
During a hearing with Bush administration regulators last week, members of the House Financial Services Committee suggested several proposals aimed at protecting both homeowners facing foreclosures and lending institutions.
Among the proposals was an expansion of the role for Fannie Mae and Freddie Mac to buy more mortgages, especially jumbo loans. Another proposal was to amend the tax laws so that homeowners facing foreclosure are not taxed on the balance of the loans that are forgiven.
Democratic lawmakers made it clear they will push legislation to accomplish both things.
But Bush administration officials made it clear they do not plan an expanded role for Fannie or Freddie, a so-called rescue by the "Lone Ranger," as Rep. Paul Kanjorski of Pennsylvania put it.
Instead, Robert Steel undersecretary for domestic finance at Treasury, said the Administration is focusing on identifying and counseling troubled homeowners and seeking "innovative" products to help troubled homeowners to refinance their mortgages.
The hearing bared major differences between the Bush administration, which is working on legislation to rein in the powers of Fannie and Freddie, and Congress, which has lost enthusiasm for the legislation, as the mortgage crisis broadens from the subprime market to the overall market.
Many in Congress, especially the Democrats, see the two secondary mortgage giants as an immediate way to pump liquidity into the market.
The Democrats are proposing allowing Fannie and Freddie to buy jumbo loans; to ease restrictions on refinancing of loans they have bought from lenders; and to increase the total number of loans they buy, which has been curtailed in recent years by the Bush administration.
Using the accounting scandals at both Fannie and Freddie, the Bush administration is seeking to rein in the market influence of the two government sponsored enterprises, which they believe distorts the mortgage markets.
President Bush said recently he has no plans to authorize an expansion of powers for the two companies to help deal with the mortgage crisis.
This has forced the Democrats to seek a legislative solution, which will take months, at least, probably much longer. That raises the question of whether any legislative initiative will have a meaningful affect on the current crisis.
Several Republicans on the Financial Services Committee agreed with the Administration and were reluctant to have the government intervene in the mortgage market meltdown.
The day before the hearing, the financial regulators, including NCUA, had issued a call to all mortgage lenders for forbearance on all mortgages they hold and/or service.
In a joint statement, the regulators encourage federally regulated financial institutions and state-supervised entities that service securitized residential mortgages "to identify borrowers at risk of default and pursue appropriate loss mitigation strategies designed to preserve homeownership."
"Significant numbers of hybrid adjustable-rate mortgages will reset throughout the remainder of this year and next," the statement said. It said "many subprime and other mortgage loans have been transferred into securitization trusts that are governed by pooling and servicing agreements."
"These agreements may allow servicers to contact borrowers at risk of default, assess whether default is reasonably foreseeable, and, if so, apply loss mitigation strategies designed to achieve sustainable mortgage obligations."
Appropriate loss mitigation strategies may include, for example, loan modifications, deferral of payments, or a reduction of principal, said the statement.
In addition, institutions should consider referring appropriate borrowers to qualified homeownership counseling services that may be able to work with all parties to avoid unnecessary foreclosures, said the regulators.
Testifying at last week's hearing with Steel were Sheila Bair, head of the FDIC, John Dugan, Comptroller of the Currency, and Eric Sirri, director of Securities and Exchange Commission's division of market regulation. The gist of their testimony was that most of the federally insured mortgage lenders-banks and S&Ls - are in strong enough financial condition to weather the current crisis.
But the regulators also warned that the crisis is not over yet and many more holders of subprime mortgages are expected to default on their loans over the coming months, as a large number of two-year ARMs reset at higher rates.
Last week's hearing, one of the first since the return of Congress from its August recess, was abbreviated, as the committee originally planned to include representatives from Fannie Mae, Freddie Mac and the Federal Reserve.
But Chairman Barney Frank said he agreed to let the Fed wait to testify until after its Open Market Committee meets Sept. 18 to set interest rates, in order not to influence the rate-setting process. He also hopes to include Fannie and Freddie in the debate during a later hearing.
