Word came late last week from both the Federal Reserve and the White House that the federal government does not intend to stand by and watch the housing and credit crisis drive the country into recession.
President George W. Bush announced a series of proposals intended to help homeowners
faced with mortgage defaults and Federal Reserve Chairman Ben
Bernanke told a group of bankers in Jackson Hole, Wyoming that, while the Feds
were not about to rescue Wall Street or shield investors from self-inflicted
loses, the committee will monitor the situation and act as needed to limit the
damages to the broader economy that may grow out of disruptions in the financial
There is wide speculation that the Fed will cut its rate for overnight federal funds by at least a quarter point at its next meeting in mid-September and Bernanke’s remarks were interpreted as further signaling such a move.
The President announced his program while insisting that the U.S. economy was healthy and that subprime market problems were affecting only a small part of the overall economy.
The President called on Congress to pass Federal Housing Administration (FHA) Modernization Legislation which would permit lower down payments, allow FHA to insure bigger loans, and give it more pricing flexibility. These reforms, the President said, would allow FHA to help more families buy homes and offer more options to homeowners looking to refinance existing mortgages.
The administration will also launch a new FHA Initiative Called "FHA-Secure" designed to help people with good credit but who have not made all of their payments on time because of rising mortgage payments. FHA would be able to offer many of these homeowners an option to refinance existing mortgages so they can make their payments and keep their homes. FHA will also charge mortgage insurance premiums based on the individual risk of each loan, using traditional underwriting standards, so it can expand access and help even more families.
Bush asked Congress to change a provision of the federal tax code that counts cancelled mortgage debt on primary residences as taxable income. In the event of a short sale or a foreclosure, if the mortgage company recoups less than it is owed and that amount is forgiven, present tax code treats it as taxable income. The President proposes temporary relief to ensure that cancelled mortgage debt on a primary residence is not counted as income.
The President said he had asked Housing and Urban Development Secretary Alphonso Jackson and Treasury Secretary Henry Paulson to reach out to groups that offer foreclosure counseling and refinancing - community organizations like NeighborWorks, mortgage lenders and loan servicers, FHA, and Government-Sponsored Enterprises like Fannie Mae and Freddie Mac - with the goal of expanding mortgage financing options, identifying homeowners before they face hardships, and helping them understand their financing options and find an appropriate mortgage product.
Bush also cited other programs that the federal government is initiating or backing:
- Improving disclosure requirements so homeowners receive complete, accurate, and understandable information about their mortgages.
- Strengthening mortgage lending standards.
- Reforming the Real Estate Settlement Procedures Act (RESPA) to promote comparative shopping by consumers for the best loan terms, provide clearer disclosures, limit settlement cost increases, and require fee disclosure.
- Supporting state-based efforts to toward comprehensive mortgage broker registration.
- Pursuing wrongdoers and predatory lenders to ensure they are punished. HUD, the Department of Justice, the Federal Trade Commission, and others, are aggressively pursuing this program.
- Encouraging financial literacy with the help of leading private sector individuals.
- Inclusion in the president's Budget of $120 million for NeighborWorks, which provides foreclosure workshops and counseling to borrowers and $50 million for HUD's housing counseling program.
- The President's Working Group On Financial Markets, led by Treasury Secretary Paulson and representatives of the Federal Reserve, Securities and Exchange Commission, and the Commodity Futures Trading Commission is examining some of the broader market issues underlying the recent mortgage problems including the role of credit rating agencies and how their ratings are used in lending procedures, and how securitization, the repackaging and selling of assets, has changed the mortgage industry and related business practices.