White House, Congress Make New Moves to Stem Credit Crisis

WASHINGTON — The White House and key congressional leaders offered new plans Thursday to mitigate the nation's widening mortgage crisis, reflecting their growing alarm about its effect on homeowners and the financial industry.

"We are in a recession now," said House Financial Services Chairman Barney Frank, D-Mass. "We have to do something."

Frank stood with Senate Banking Chairman Chris Dodd, D-Conn., at a news conference where they announced a plan to reverse the rising number of home foreclosures. They want to let the Federal Housing Administration (FHA) insure and guarantee mortgages after lenders have significantly reduced the principal to help struggling borrowers stay in their homes.

"What we're trying to do here, in addition to providing assistance to the homeowner, is to create a floor" under home values, which are falling as foreclosures rise, Dodd said.

Separately Thursday, Treasury Secretary Henry Paulson unveiled a lengthy set of recommendations to strengthen federal oversight of the mortgage and credit markets.

"Poor judgment and poor market practices led to mistakes by all participants," Paulson said, and federal officials must "minimize the likelihood of this happening again."

Dodd and Frank did not introduce legislation, but produced an outline for congressional action. During the two-week Easter recess that starts Monday, the lawmakers plan to finish drafting the legislation that would allow FHA to begin providing up to $300 billion in loan guarantees for "at risk" borrowers.

Senate Majority Leader Harry Reid, D-Nev., said this week that when the recess ends March 31, he will keep the chamber's focus on housing-related legislation.

According to the chairmen's outline, FHA could back mortgages only if lenders were willing to accept a substantial reduction of a loan's principal — down to no more than the home's current market price.

Lenders will have to accept some losses and take "a haircut," Frank said. Still, doing nothing would have worse consequences, because home values are falling while more families are losing their homes.

"This could potentially refinance between one and two million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market," the outline said.

Frank said portions of the plan could shift as he works with other lawmakers and Bush administration officials to reach compromises.

Congress has no choice but to act, because "this is the worst housing crisis in our lifetime," Dodd said. "We are in a recession. ... The question is: how deep is this going to go? How long lasting will it be?"

The recommendations unveiled by Paulson follow seven months of consultation involving the secretary and the President's Working Group on Financial Markets, an advisory body composed of officials from the Treasury, the Federal Reserve Board, the Securities and Exchange Commission, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission.

To help prevent more problems, the Working Group developed recommendations that generally could be implemented quickly because they would not require action from Congress.

For example, the recommendations call on bank supervisors to pay more attention to their own companies' due diligence, risk management and risk awareness policies. They also urge regulators to put less confidence in credit-rating firms' evaluations of risk.

The Working Group recommended creation of a national registration system for mortgage brokers, an idea the Democrat-led House supports.

In a statement, Federal Reserve Chairman Ben Bernanke praised the recommendations as an "appropriate and effective response to deficiencies in our financial framework that contributed to the current turmoil in financial markets."

Over the past two years, more and more homeowners have been failing to keep pace with the rising interest rates on their subprime mortgages. Such loans proliferated from 2002 to 2005 when home values were rising rapidly. The loans, used by people with irregular income or weak credit histories, typically involved low "teaser" rates that would move higher over time.

With millions of families now unable to make those bigger payments, mortgage defaults are shooting up and roiling credit markets.