Mortgage News Daily

The rising tide of foreclosures is putting enormous pressure on the US government to lead a bailout of distressed mortgage holders.

However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders. 

There are "human casualties," as people see their credit blotted, making them wary about spending and putting the economy at risk of recession, if it is not in one already.

Senators from both parties returned from their Easter break determined to hammer out a housing-assistance package, and quickly. On April 2nd they agreed on a draft compromise. Though the details were sparse the package seems more a pot-pourri of modest initiatives than anything dramatic.

It includes $4 billion to help states and local governments buy and do up repossessed houses; an increase in the amount of tax-exempt bonds that states can issue to refinance subprime mortgages; some $100m more to offer advice to homeowners facing foreclosure; and a $7,000 tax credit for anyone who buys a repossessed house.

The bill would also benefit mortgage lenders and investors in many mortgages since it could prevent a wave of foreclosures. While lenders and mortgage holders would receive less than what is currently owed on the loans with the biggest risk of default, they would receive significantly more than they could hope to recover if the loan goes through the foreclosure process and the home is sold at a sharp discount. In other words, something is better than nothing.

With this in mind, some economists believe the Dodd-Frank proposal could cost more than $100 billion. This is obviously a pretty large number and because of this, there is a debate over whether taxpayer money should be used to bail out the relatively small percentage of homeowners that have run into problems paying their mortgages.

Pressure for a more direct government effort to help mortgage holders is coming from contenders for the Democratic nomination to run in November's presidential election. Meanwhile, Democratic lawmakers have drawn unflattering contrasts between the administration's hands-off approach to individuals and its readiness to help big Wall Street firms.

Democratic contender Sen. Hillary Clinton advocates extending at least $30 billion to help state and local governments stave off foreclosures while her opponent, Sen. Barack Obama, wants an FHA-led program that could induce lenders to buy and refinance troubled loans.

By contrast Sen. John McCain, who has the Republican presidential nomination secured, sounds just like the Bush administration. He said this week it was "not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers."