WASHINGTON — Senate Banking Committee Chairman Chris Dodd's plan to expand the government's role in stemming the housing crisis hit new obstacles Thursday as two top panel members signaled their opposition.
Sens. Richard Shelby and Robert Bennett, the Banking Committee's two highest-ranking Republicans, said the legislation would raise the government's costs.
"I believe there is a line we should not cross," Sen. Shelby said on the Senate floor. "That line is represented by a taxpayer-funded bailout of investors or homeowners that freely and willingly entered into mortgages that they could have known or should have known they could not afford."
The Alabama Republican called Sen. Dodd's plan "just such a proposal."
Sen. Bennett, during a Senate Banking hearing on the issue Thursday, said that he is frustrated by blanket references to "the housing crisis," since the problem isn't "monolithic," and that sweeping government intervention into home appraisals could exacerbate market problems.
"To arbitrarily have some government agency or someone backed by a government agency try to determine market value is going to be very difficult," the Utah Republican said.
At issue is a bill from Sen. Dodd and House Financial Services Committee Chairman Barney Frank, D-Mass., that would let the Federal Housing Administration insure mortgages worth more than the value of the home after lenders take a significant haircut.
Under a draft of Sen. Dodd's bill, lenders would voluntarily write down underwater mortgages for borrowers who cannot afford them to below the home's appraised value. Participation by lenders would be voluntary.
In a press conference following the Senate's passage of a housing stimulus bill by a vote of 84 to 12 on Thursday, Sen. Dodd said he believes his FHA plan can still be successful.
Though the Connecticut Democrat supported the stimulus package, which includes provisions to enhance mortgage disclosures and give tax breaks to those who buy foreclosed properties, he said much more is needed.
Sen. Dodd said he hopes to bring his FHA plan to the full Senate by Memorial Day and may package it with other legislation, including regulatory reform of the government-sponsored enterprises and a bill to implement tighter mortgage underwriting standards.
He noted that he had attempted to add the FHA language to the housing stimulus bill, but was rebuffed by Sen. Shelby.
"I couldn't get it in at all," Sen. Dodd said. "There was just too much opposition to it. … We'll come back at the appropriate time and try to move that in the next few weeks."
But he also said he has hopes that Sen. Shelby ultimately will change his mind.
"Senator Shelby has some very strongly held views on these matters generally, but I think he's willing to listen to ideas," Sen. Dodd said. "I'm going to continue to make that case, and I believe in the end we should be able to work something out."
But Sen. Shelby showed no signs of that Thursday. Though he did not appear at the Banking Committee hearing on the plan, he submitted a litany of questions that cast doubt on its effectiveness.
"Would the proposal assist the homeowner who knowingly purchased more home than they could afford in hopes of riding the home appreciation wave?" he asked.
Sen. Shelby, who has questioned the necessity and soundness of the FHA and called it an outdated government relic, also questioned whether the plan was fair and whether it would prevent foreclosures as intended.
"What about the prudent individual who decided to save for a down payment while renting? Should they be made to pay for the mistakes of delinquent borrowers or speculators? What kind of signal would this send to those who did the right thing by waiting and saving their money? How much will this truly cost the taxpayer?" he asked. "Once we allow the seriously delinquent borrower to refinance into an FHA loan, what prevents them from defaulting again?"
Sen. Bennett seized on comments by former Treasury Secretary Lawrence Summers, who, despite testifying before the panel to broadly support the FHA refinancing plan, said he harbored some fears that improper implementation could drag out the housing crisis.
"Secretary Summers, I applaud you in your final statement where you say, 'It is essential that policies that serve only to delay inevitable adjustments can easily prove counterproductive,' " Sen. Bennett said during the hearing. "In our effort to be seen as doing something, the Congress inevitably moves in that direction."
In his remarks, Mr. Summers also raised other issues in the FHA plan. He said that finding fair appraisals in a uncertain market will be tricky, especially when the program requires lenders to write loans down beneath market value to participate.
"In an illiquid market with a very large inventory, doing that appraisal is not an easy thing to do accurately," he said. "The people who are going to bear the burden if there are misappraisals are going to be the taxpayers… and so I would urge that there be very considerable attention given to the incentives in the appraisal process as this takes place."
He also reiterated a point of contention that there is a lack of incentive for subordinate lien holders to release those loans to allow a refinancing plan to go through.
Finally, Mr. Summers pointed out that about 20% of loans held by the Depression-era Home Owners Loan Corp. ultimately were foreclosed on. That program — unlike the current plans for the FHA — was implemented once the housing market had bottomed out, and borrowers then generally held more equity than they do today, he said.
Though he would not predict what proportion of loans were likely to fail in an FHA refinancing plan, he told lawmakers to be "realistic" about their expectations.
