What Democrats call a housing crisis—and a top Republican labeled a housing slump—stands to be front and center this week as Congress returns from its recess to confront the foreclosure crisis threatening a million or more U.S. homeowners. Senate Majority Leader Harry Reid, in an opening salvo Monday from the Senate floor, hearkened back to the Great Depression and said American people were suffering while the economy was deteriorating. The Nevada Democrat's battle cry: There's been help to Wall Street, with the $29 billion rescue of investment banker Bear Stearns, so let's now help Main Street. "The [housing] crisis is real, it is immediate, and it calls for Congress to take action," Reid said on the Senate floor.
Earlier Monday, he spoke to reporters in a conference call with Sen. Chris Dodd, chairman of the Senate Banking Committee. Dodd, a Connecticut Democrat, recounted a visit last week to Bridgeport, his state's largest city with a population of 138,000, which he said has had 6,000 foreclosures. "My state is not the exception. In fact, this is going on all across the country," he said. The Mortgage Bankers Association estimates that at the end of 2007, 2.04 percent of the 53 million residential mortgages in the country were in foreclosure.
Reid is behind a bill called the Foreclosure Prevention Act, which Republican senators thwarted in February when they refused to allow debate on the measure. Republicans' main gripe was a provision to allow bankruptcy judges to modify mortgages on primary residences by lowering interest rates, lengthening the life of loans or forgiving some of the loan principal. Democrats say more than 600,000 people could be helped. Senate Minority Leader Mitch McConnell, in his own floor statement, said the nation was confronting a "housing slump" and condemned the proposed change in bankruptcy laws. "There is no way this proposal is going to fly," the Kentucky Republican said. His spokesman, Don Stewart, said the mortgage industry has insisted that to accept the changes would mean there would be up to a 2 percent hike in interest rates for all who buy a new home or refinance. More people would be hurt than Democrats say will be helped—for example, more than 400,000 people in New York state and more than 500,000 people in Illinois, Stewart said.
The opening-day skirmishes foreshadow contentious debate on how much the federal government should do to help struggling homeowners. Proponents of assistance say the mortgage meltdown, triggered by the subprime lending crisis, has led to declining home values nationwide and a credit crisis impacting other sectors of the economy. Critics say too much help rewards borrowers and lenders who made bad or risky decisions. Republicans were quick to note that no Senate committee had vetted Reid's bill. One of its other provisions would provide $200 million in preforeclosure counseling to let as many as 500,000 families connect with mortgage servicers or lenders to explore options to keep them in their homes. Another would give $4 billion in community block grant dollars to let localities hardest hit by foreclosure buy these properties to rent or resell them.
Dodd has been working on initiatives with Rep. Barney Frank, chair of the House Financial Services Committee. Frank, a Massachusetts Democrat, has proposed allowing the Federal Housing Administration to renegotiate troubled mortgages and insure up to $300 billion in new ones. The plan calls for existing mortgage holders or lenders to agree to a substantial write-down of the principal in exchange for a payment from the proceeds of a new, guaranteed loan. Frank plans hearings April 9 and 10 to hear from federal regulators, economists, academics, and community leaders. Dodd, for his part, plans a hearing Thursday to examine the sale agreement between Bear Stearns and JPMorgan Chase.
At the White House, spokesman Tony Fratto reiterated Republican opposition to the change in bankruptcy laws in Reid's bill. "We continue to look at any good ideas out there that would help with the issues in the housing markets," he said. But the administration would not back a program that would amount to a bailout of speculators "and other nondeserving groups," Fratto said. Nor does the administration favor any proposal to buy up distressed properties in bulk. "That doesn't fix the problem. You still have houses that need a buyer...and the U.S. government owning a declining asset," he said.