WASHINGTON — Senate leaders late Wednesday unveiled bipartisan legislation that would provide funds for mortgage counseling, tax incentives for home buyers willing to purchase a foreclosed or newly built home and aid to states struggling with rising foreclosure rates.
"We helped Wall Street, we're all glad Bear Stearns was taken care of, but now it's our turn take care of people on Main Street," Senate Majority Leader Harry Reid, D-Nev., said Wednesday evening on the Senate floor.
The Foreclosure Prevention Act is a follow-up to February's economic stimulus plan, which is intended to spark the sagging economy. Wednesday's compromise bill targets the troubled housing sector, which is at the heart of the nation's economic problems. The compromise offers some important advances, but some economists argue that it falls far short of what's needed.
"Anything that helps on affordability is going to provide some assistance," said Brian Bethune, U.S. economist for Global Insight, a forecaster in Lexington, Mass. "The question is whether they are trying to dig out the ocean with a teaspoon."
The compromise plan would provide almost $11 billion in tax breaks to homeowners, lenders and homebuilders. It was reached after the Senate majority and minority leaders and the top Democrat and Republican on the Banking Committee agreed on a core set of principles. When they couldn't agree, they set in place a procedure for voting on the more controversial proposals as amendments.
"Getting to this point has required compromise by all sides. This is a solid, bipartisan start to keeping families facing foreclosure in their homes, helping other families avoid foreclosures in the future, and helping communities already harmed by foreclosure to recover," said Reid and Minority Leader Mitch McConnell, R-Ky., in a joint statement.
Over the next several days, senators will debate both the core plan and more controversial amendments, such as a Democratic plan to give judges the power to change the terms of a mortgage when a homeowner has filed for bankruptcy.
Current law prevents judges from reworking the terms of a home loan. Both Republican lawmakers and President Bush oppose this provision, arguing that however well intentioned, it would prompt lenders to rein in lending to all but the safest borrowers, exacerbating the current near-freeze in mortgage lending.
The core of the Foreclosure Prevention Act would:
_ Increase the Federal Housing Administration's loan limit from 95 percent to 110 percent of an area's median home price. This would allow families in all areas of the country better access to FHA loans with down payments of 3.5 percent.
_ Provide $4 billion in federal aid to local governments in areas hit hardest by foreclosures and mortgage delinquencies.
_ Provide $100 million in additional federal funding to groups that provide mortgage counseling.
_ Prevent lenders from foreclosing on a home owned by a soldier within nine months of his or her return from active duty.
_ Force lenders to give active-duty soldiers one year's relief from a mortgage rate that adjusts upwards.
_ Raise the standard income tax deduction for property taxes by $500 for single filers and $1,000 for families.
_ Provide $10 billion for federal tax-exempt bonds whose proceeds can be used to refinance sub-prime loans or finance first-time home purchases.
_ Give a $7,000 tax credit to purchasers of newly built homes, properties in foreclosure or those whose owners have defaulted on their mortgages. This aims to reduce the supply of homes for sale.
Sen. Christopher Dodd, D-Ct., the chairman of the Senate Banking Committee, acknowledged that he was forced to compromise. "It's not the end of the road, but it is a very strong beginning," he said.
Bethune of Global Insight said that a proposal by Dodd and House Banking Committee Chairman Barney Frank, D-Mass., would help housing more. They propose that the Federal Housing Administration provide up to $400 billion in guarantees for distressed mortgages that are reworked voluntarily by lenders.
"I think that is a proposal that has a lot more potential to make an impact," said Bethune.
Under the Dodd-Frank plan, lenders would agree to write off a portion of a distressed loan, and the federal government would then guarantee the modified mortgage. Some proposals call for these reworked loans to be auctioned off to investors.
The Bush administration has favored voluntary loan modifications by lenders.
ON THE WEB
Highlights of the Foreclosure Prevention Act.
Tax implications of the measure.
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