WASHINGTON — When Congress returns from recess today, its top financial services priority for the fall agenda will be responding to the crisis in the mortgage markets.
President Bush and Federal Reserve Board Chairman Ben Bernanke added urgency to the issue Friday, as the president called for changes to help struggling subprime borrowers and the central bank chief warned that worse-than-expected losses could disrupt the broader economy.
Lawmakers and observers said that with those statements there is suddenly more pressure on Congress to act quickly on bills to reform the Federal Housing Administration and rein in predatory lending. Democrats are widely viewed as having more leeway to enact tough restrictions on mortgage lenders and brokers.
A key test will come Wednesday, when House Financial Services Committee Chairman Barney Frank holds a hearing with regulators and industry representatives on how to deal with the credit crisis.
“It is clear to me … that both Treasury and the Federal Reserve and others were surprised by the extent to which there was a spillover. That’s troubling,” Rep. Frank said in an interview Friday. “We have to look at two things: One, what can they do in the near term? But we are going to be focusing even more on what changes should we be making — if any — in the regulatory structure so that we don’t get surprised again.”
The Massachusetts Democrat said he was pleased President Bush and Mr. Bernanke recognize the extent of the problem, and agreed that their comments add momentum to legislation on FHA and subprime lending.
“It is clear that regulation and market intervention has a bigger role to play than some of the conservatives were arguing a few months ago,” he said. “That doesn’t mean that they agree with us on everything, but I think we’ve crossed a big barrier and we are now into specifics rather than this ideological divide.”
Rep. Frank said he spoke with Treasury Secretary Henry Paulson Friday morning and Sen. Charles Schumer, who has been pushing a subprime lending bill, earlier in the week. He said those conversations had him hopeful that the Senate would finally act on a bill to reform the regulation of the government-sponsored enterprises, which the House passed in May.
FHA reforms were the focus of President Bush’s proposal on Friday. The president called for making some immediate changes, including allowing struggling subprime borrowers to refinance into less-costly FHA loans, and urged Congress to pass broader reforms for the agency that would modernize FHA by lowering down payment requirements, increasing loan limits and create pricing flexibility.
Mr. Bush also said he wanted to enact a temporary tax-relief measure to allow borrowers who have refinanced into a cheaper mortgage to be forgiven from paying income tax on the amount of the cancelled debt.
President Bush called for a foreclosure-avoidance initiative in which the Department of Housing and Urban Development and Treasury would reach out to community groups that provide foreclosure counseling and refinancing.
He also said the administration would be stepping up its efforts to hold brokers accountable for fraud and force them to disclose complex fees clearly.
“This administration will soon issue regulations that require mortgage brokers to fully disclose their fees and closing costs. … If you’ve been cheating somebody, we’re going to find you and hold you to account,” he said during a speech at the White House Rose Garden.
His comments came just after a speech in which Mr. Bernanke warned for the first time that subprime problems were spilling over into other financial markets and threatening to slow economic growth.
“The financial turbulence we have seen had its immediate origins in the problems in the subprime mortgage market, but the effects have been felt in the broader mortgage market and in financial markets more generally, with potential consequences for the performance of the overall economy,” Mr. Bernanke said in prepared remarks at the Federal Reserve Bank of Kansas City’s economic summit in Jackson Hole, Wyo.
Both Mr. Bush and Mr. Bernanke cautioned they could not support a bailout for lenders that aggressively marketed unaffordable loans.
Rep. Frank seized on another comment in Mr. Bernanke’s speech in which he blamed the securitization process for helping to aggravate problems in the subprime market.
“When most loans are securitized and originators have little financial or reputational capital at risk, the danger exists that the originators of loans will be less diligent,” Mr. Bernanke said. “In securitization markets, therefore, monitoring the originators and ensuring that they have incentives to make good loans is critical.”
Rep. Frank said that sounded to him as though Mr. Bernanke was endorsing some type of assignee liability, a provision the lawmaker plans to include in his upcoming subprime lending bill, in which lenders are held responsible for the loans they buy.
“Earlier this year when we talked about some kind of liability … in the secondary market, people thought if we did that we would kill the secondary market,” Rep. Frank said. “Then in the meantime the secondary market killed itself, and what he’s acknowledging here — Ben is — if you do the right kind of regulation you help the market, because you give investors some quality assurance.”
Though it was clear the Bush administration was actively pushing for the FHA bill, observers were not sure whether it would also support efforts to rein in certain subprime products and practices. House Democrats, led by Rep. Frank, are expected to introduce a bill soon that would restrict the use of prepayment penalties and no-document loans, among other things. Rep. Frank said he hopes to holds a committee vote on the bill in October.
In an interview, Treasury Undersecretary for Domestic Finance Robert Steel said he was encouraged by reaction to the president’s call for reform, and left the door open for further reforms.
“We don’t have a monopoly on all ideas, so we’ll look forward to hearing what others think,” he said.
Asked specifically about subprime practices that have come under fire, Mr. Steel said he was waiting to see more action from regulators on the subject. (The Fed has promised to write a rule under the Home Ownership and Equity Protection Act reining in abusive lending practices.)
“The first thing I’d like to do is watch to see what the regulators say,” he said. “Let’s look at that and see how... things go from there.”
He reiterated that Treasury opposed raising the caps on the mortgage portfolios of Fannie Mae and Freddie Mac, and said he would leave it to Congress to decide whether to raise the conforming loan limit for the two GSEs, which is currently $417,000.
Friday’s flurry of activity left industry representatives sure that Congress — which often turns to other issues in the last few months of the year — will remain focused on financial services issues.
“Mortgage issues will take center stage,” said Kurt Pfotenhauer, lead lobbyist for the Mortgage Bankers Association. “It improves the prospects for FHA reform and GSE reform, and I would expect that the timetable for consideration for the anti-predatory-lending bill that Barney Frank is writing has been moved up.”
Many subprime loans are due to reset in October, and as more default, pressure on Congress will increase, several observers said.
“When we get reports that subprime foreclosures are up 100% year over year, that is going to energize Democratic constituencies and put enormous pressure on Congress to pass broader reform legislation,” said Jaret Seiberg, an analyst with Stanford Washington Group.
Howard Glaser, a mortgage industry consultant, agreed. The president’s speech was “an acknowledgement that there’s more bad news ahead … so the president is inoculating himself from future bad news,” he said.
Though the House has already passed GSE reform and is likely to pass FHA and subprime lending bills this year, their fate in the Senate remains uncertain.
Senate Banking Committee Chairman Chris Dodd, D-Conn., said he supports the president’s FHA plan and is likely to make that a priority this month.
But Sen. Dodd declined to commit to subprime lending legislation, instead saying he is waiting for the Fed to write a rule.
Reform of the GSEs has remained stalled in the Senate for two years, however, and though industry observers are hopeful it can be passed by the Banking Committee soon, it is unclear if that will happen.
The subprime mortgage issue, meanwhile, has become a hot topic in the presidential campaign, especially among Democrats. Sens. Hillary Clinton and Barack Obama have endorsed a laundry list of reforms, while Sen. John Edwards has also called for government action. Sen. Dodd, who is also a candidate for president, may eventually be compelled to push legislation as well, several observers said.
Lawmakers in the House, meanwhile, are pursuing other solutions to the crisis.
Rep. Brad Miller, who is co-authoring the subprime lending bill with Rep. Frank and Rep. Mel Watt, a fellow Democrat from North Carolina, said in an interview Friday that he supports efforts to change the bankruptcy code this fall so that troubled homeowners could restructure a primary mortgage in bankruptcy to prevent foreclosure.
“There is a provision in the 1978 bankruptcy code that prohibits bankruptcy judges from modifying home mortgages, but they can modify any other kind of debt,” Rep. Miller said. “That obviously should change. It probably made sense in 1978 when all mortgages were 30-year fixed mortgages with ample liquidity. That’s not true now, and it doesn’t make any sense for that exception.
Though industry lobbyists said such legislation has slim odds of passage, since it would likely devolve into a more controversial debate on 2005 changes to the bankruptcy code, consumer groups said a narrow change has a chance.
“Recent events have made it much more feasible for Congress to seriously consider a targeted amendment to the bankruptcy code that provides relief to some of the millions of families who are facing foreclosure in this mortgage crisis,” said Michael Calhoun, the president of the Center for Responsible Lending.
