US mortgage clock ticking, Dodd warns
There are only a few weeks left for Congress and the BushChris Dodd, one of the most senior lawmakers overseeing US economic policy. administration to agree on large-scale government intervention in the mortgage market, according to
In an interview with the Financial Times, Mr Dodd said that a compromise deal needed to be reached before home prices collapsed further and election-year politics took over. "I am optimistic at this point, but this has to happen fairly quickly if it is going to be meaningful."
Mr Dodd, the Connecticut Democrat who chairs the Senate banking committee, last month made an aggressive proposal to use public funds to guarantee the refinancing of up to $400bn (€250bn, £200bn) in mortgages at lower values through the Federal Housing Administration, the government-owned mortgage insurer.
The plan is designed to tackle the problem of negative equity - or homeowners holding mortgages worth more than the value of their homes - which has been a key feature of the US housing crisis.
While Mr Dodd said "there is obviously some risk" to taxpayers associated with the plan, he claimed it would help "determine a floor in residential mortgages" and said that doing nothing would allow contagion to spread across US financial markets and the economy.
Mortgage servicers, who manage loan payments on behalf of lenders, would voluntarily agree to forgive parts of loans to struggling borrowers in exchange for some participation in the benefits of future appreciation, according to the proposal, which would be confined to borrowers funding their primary residences.
A similar plan has been moving through the House under the sponsorship of Barney Frank, the chairman of the financial services committee.
While the proposals have been supported in general by US banking regulators, they have not been endorsed by either the Bush administration or many Republicans on Capitol Hill. Mr Dodd failed in his attempt to include his plan in a narrower package of measures to prevent foreclosures that passed the Senate last week.
"I have got a clock in my own head and that clock runs out in the next several weeks," said Mr Dodd. He added that he had "some work to do to find out what the tolerance levels are", and complained that he was "getting mixed messages" from the administration.
Mr Dodd was still hammering out the final details of his proposal, and was open to considering additional incentives that have been proposed for servicers to write down the value of mortgages. These include "negative equity certificates", which would allow lenders to share in any recovery in house prices, and measures to shield servicers from litigation.
A deal with the administration could involve a wider compromise including legislation to reform Fannie Mae (NYSE:FNM) and Freddie Mac, the government-sponsored mortgage companies, which Hank Paulson, Treasury secretary, has been urging.
The White House and many Republicans have opposed large-scale intervention in the mortgage market amid fears that they would bail out speculators and reward bad behaviour, as well as potentially lose taxpayer money.
"In the current housing crisis I think we have to draw a line. Some homeowners used poor judgment. A lot of lending companies want a bail-out," said Brian Montgomery, federal housing commissioner, at a Senate hearing to examine Mr Dodd's proposal yesterday.
The administration's efforts to tackle the mortgage crisis have so far focused on the HopeNow alliance, a private-sector initiative to help borrowers avoid foreclosures by reworking their mortgages.