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Friday, January 9, 2009

Mortgage Help Gains Momentum

NEW YORK ( -- There are many ways to spend $800 billion to revive the economy. In recent days, President-elect Barack Obama has ticked off many of them: invest in infrastructure projects, help states pay for Medicaid, cut taxes on the middle class, expand use of renewable energy.

But what about helping those at risk of foreclosure, and by extension the housing market as a whole?

Lawmakers in Washington are demanding that more be done, and they are aiming their sights both at the $700 billion financial rescue package known as TARP and the massive economic stimulus bill Obama is pushing as vehicles for new housing measures.

Already, Treasury Secretary nominee Timothy Geithner is working on plans to revamp the way TARP is used to make foreclosure prevention a bigger priority, two transition aides told CNN. Congress has made it known that it likely won't release any more TARP funds until some of the money is earmarked for housing.

For his part, Obama has been shy on details but has said that within a month or two he would unveil "a sweeping effort to address the foreclosure crisis so that we can keep responsible families in their homes."

Meanwhile, Senate Budget Chairman Kent Conrad, D-N.D., on Wednesday said it would be a mistake to pass a stimulus bill without also tackling the housing crisis.

"The housing market is 16% of the economy," Conrad said. "To think that we are going to have a package of economic recovery that does not address housing adequately I think would miss the boat."

What's on the table

Use TARP for homeowners: House Financial Services Chairman Barney Frank, D-Mass., is writing a bill that would impose conditions on the use of any more TARP money. He sent a memo to colleagues this week calling for "substantial efforts" to be made to reduce foreclosures, a spokesman for Frank's office said in an e-mail.

One of his suggestions: mandate that some TARP money be used to support a version of a plan proposed by FDIC Chairwoman Sheila Bair. The FDIC has estimated the cost of that program at roughly $25 billion, although other estimates run higher.

Bair's plan would systematically modify loans and provide a government guarantee to protect investors in the event a homeowner re-defaults after the loan has been modified.

Reform bankruptcy law: On Thursday, Senate Banking Chairman Christopher Dodd, D-Conn., and Sen. Richard Durbin, D-Ill., said that Citigroup (C, Fortune 500) has agreed to support a proposal that the lending industry has strongly opposed that would allow bankruptcy judges to write down the primary mortgages of homeowners filing for bankruptcy.

The bank's support of the proposal is based on the condition that the change only apply to existing mortgages and that homeowners filing for bankruptcy notify their lenders 10 days before to give them a chance to modify the mortgage.

Other lenders and housing industry interests -- including the powerful National Association of Home Builders -- have also started to lower their resistance to so-called bankruptcy cramdowns.

The long-held argument against cramdowns is that they would cause rates to rise because mortgage securities investors would demand a higher interest rate to compensate for the risk that a judge could rewrite mortgage contracts on terms disadvantageous to the investor.

Offer bigger tax break to home buyers: NAHB has been pushing for all home buyers to get a temporary tax credit for buying a primary residence worth up to 10% of the purchase price. A tax credit is a dollar-for-dollar reduction of one's tax liability.

Currently, only first-time buyers may get a temporary tax credit worth up to $7,500 for a limited period of time. But that credit functions more as an interest-free loan from Uncle Sam because the home buyer has to repay it over time.

Neither Dodd nor Senate Finance member Charles Schumer, D-N.Y., speaking to the press on Thursday, endorsed the idea of an actual tax credit. Dodd said a tax credit would not help prevent foreclosures but could spur economic growth.

And Schumer said there was "broad support" among members of the Senate Finance Committee to make tax policy changes to support housing, particularly existing homes as opposed to newly constructed ones.

Push interest rates down: The National Association of Realtors, among others, has pushed for the Treasury Department to take a more active role in driving mortgage rates down by buying securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac.

A plan already in place at the Federal Reserve has already had the effect of lowering rates on the 30-year fixed to record lows. The Fed is buying up to $500 billion in mortgage-backed securities backed by Fannie and Freddie, a move that bolstered confidence in the mortgage giants' ability to continue to buy and back loans in the secondary market.

Another idea that has been floated recently is to have Uncle Sam use money to buy down points on home buyers' mortgages to lower interest rates.