What Happened to Housing?

Bill Aimed at Mortgage Crisis Stalling in Senate, Faces Potential Veto if Passed

Sen. Christopher Dodd (D-Conn.) (WDCpix)

Earlier this week, Sen. Christopher Dodd (D-Conn.) took to the chamber floor and made a bold announcement about congressional efforts to tackle the nation's accelerating foreclosure crisis. "There is no question in my mind that the almost daily information we are receiving on the performance of our economy should continue to spur action on the part of this Congress," the Senate Banking Committee chairman said. "We hope to put on the president's desk by July 4 this comprehensive Financial Services/Banking Committee proposal."

But housing experts of all ideologies wonder if the prediction isn't more optimistic than realistic. Dodd and other Senate negotiators face the difficult task of reconciling their strategy with legislation crafted in the House. More important, the Bush administration contends that both chambers' bills go too far to bail out the lenders and speculators who contributed to the mess. The White House has threatened to veto the legislation.

The saga is playing out in a very different timeline than the negotiations held earlier in the year over another must-pass legislative package designed to prevent economic collapse. Under that deal, it took just days for Congress and the White House to agree on a tax rebate strategy, which went into effect in May. In contrast, the housing crisis is far more complex -- and far more contentious -- relegating progress to a crawl.

The delicate negotiations could mean that federal help for struggling homeowners won't arrive until late in the year -- too late for tens of thousands of families facing foreclosure. The possible delay concerns both liberal homeowner advocates and conservative economists, who agree that the free-falling market requires a stabilizing hand from Washington.

"It's certainly an urgent problem, and it's only going to get worse as time goes on," said Alice Chasan, editor of  Shelterforce magazine, published by the National Housing Institute, an advocacy group. "Unfortunately, it's tied up with the presidential politics of the moment. It's very unclear that anything's going to happen in the next couple of months."

The sense of urgency appears to be justified. In May, nationwide foreclosure filings -- including default notices, auction sale notices and bank repossessions -- jumped to more than 261,000, according to figures released Friday by RealtyTrac, an online foreclosure database. The figure is 48 percent above that reported a year earlier, and 7 percent above April.

Most of the hike was attributable to repossessions, which "continued to surge in May -- posting a double-digit percentage increase from the previous month and more than twice the number reported in May 2007," said James J. Saccacio, chief executive officer of RealtyTrac. The trend pushed the number of bank-owned properties in the company's database to more than 700,000.

The additional supply only exacerbates the foreclosure problem. With the influx of houses arriving on the market in recent months, prices have dropped precipitously. And there's no evidence the trend is set to change. Rick Sharga, vice president of marketing at RealtyTrac, told The Associated Press that the worst won't arrive until the fall. "I don't think we've seen the high point," he told The AP.

Washington, most observers agree, must intervene to slow the free-fall. "Inaction isn't an option," said Desmond Lachman, an economist with the conservative American Enterprise Institute. "Just letting this thing play out would be very dangerous."

But there remains disagreement over how to tackle the problem.

For example, both the Senate and House proposals would establish a rescue fund through which the Federal Housing Administration could insure troubled loans. But the Senate bill would fill that fund using contributions from Freddie Mac and Fannie Mae, the nation's federally sponsored mortgage purchasers. House Financial Services Committee Chairman Barney Frank (D-Mass.) opposes that strategy, preferring to use the Freddie/Fannie pool to finance low-income housing. Frank's bill would expand the FHA using taxpayer dollars.

But according to the White House: "This attempt to shift costs to taxpayers constitutes a bailout."

Meanwhile, affordable housing advocates have criticized both chambers for failing to include language empowering bankruptcy judges to force lenders to renegotiate troubled mortgages at lower rates. Instead, both the Senate and the House bills would allow lenders to make that choice themselves. The carrot for lenders is that they can get the bad loans taken off their books. But there are no sticks forcing participation -- a concession to conservatives that riles the left.

"As long as we're relying on voluntary participation, it's difficult to assess the effectiveness," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

Josh Nassar, vice president of federal affairs at the Center for Responsible Lending, agreed. "The legislation in Congress takes a positive step forward," he said, "but it continues to put the decisions in the hands of the same lenders who are responsible for the crisis."

Additionally, observers are questioning the effectiveness of the proposals being considered. The Congressional Budget Office estimates the bills would help only about 500,000 homeowners over the next four years. "It's a small percentage of those affected at a pretty steep price," said David John, an economist with the conservative Heritage Foundation.

But in an election year, lawmakers are under the gun to act, even if only to avoid campaign-trail criticism. "Many feel that they can't leave town without doing something," Fishbein said. "The question is whether it will address the problem or not. My guess is that they'll fall short."

That means Washington will likely be forced to address the foreclosure crisis again. "There's no question," Lachman said, "that a new administration will have to revisit it."

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