Broad housing plan may prove inevitable

By Patrick Rucker - Analysis

WASHINGTON (Reuters) - Even though Washington policy-makers have rejected calls for a bailout of housing and finance markets, pressure is building for a comprehensive plan that goes beyond the big helpings of government aid already doled out.

Many analysts and politicians are calling for a bold government initiative to buy, restructure and resell failing mortgages so that they are once again fairly valued. Such a plan seems much more likely than only a few weeks ago.

Critics say Washington needs to go further because it has yet to address the root cause of the current credit crisis -- a swelling volume of mortgages in arrears and facing foreclosure. Without a plan that goes to the heart of the problem, they say, the stability of the U.S. financial system will remain under threat.

"The steps so far were needed to keep the financial markets from falling apart, but they are not addressing the root problem," said Andrew Jakabovics of the Center for American Progress, a liberal policy think-tank in Washington. "The real sigh of relief will come when the Street knows its mortgage investments are worth more than the paper they were written on."

While ruling out wholesale relief for investors who placed bad bets, the Bush administration and the Federal Reserve in practice have already put taxpayers squarely on the hook for billions of dollars in mortgage risk.

To some analysts and politicians, that amounts to preferential treatment to big business, while ordinary consumers, unable to keep up with their loan payments, face losing their homes.

The Fed has already vowed to pump $400 billion into the financial system to grease credit markets, and it has opened its emergency credit line to investment banks for the first time since the Great Depression.

Also, regulators have pushed housing finance agencies Fannie Mae, Freddie Mac and the Federal Home Loan Banks to soak up as much as $350 billion in mortgage investments. Most investors assume Washington would bail out those companies, should they get in trouble, because they hold government guarantees.

BABY STEPS OR BOLD MOVE?

Still, the numbers suggest the administration will have to act more forcefully -- and do so quickly. Nearly $200 billion of bad housing investments has evaporated since the current crisis began -- about half of the total write-offs economists expect. Meanwhile sinking home values and a record pace of failing home mortgages have taken their own toll.

"This is going to be a tricky 18 months as house prices will continue to fall," said Douglas Elmendorf, a former senior Fed staffer and now a fellow at the Bookings Institution, a nonpartisan research center. "The government is going to face continuing pressure to do something."

Democratic lawmakers have been vocal in calling for a higher-profile role for the Federal Housing Administration, which offers a federal guarantee for home loans.

The Depression-era program was conceived to help low-income borrowers buy their first homes but it has lately been seen as a useful tool to refinance troubled borrowers out of failing loans.

Barney Frank, chairman of the powerful House of Representatives' Financial Services Committee, wants to spend up to $20 billion to widen FHA's role, enabling it to soak up $300 billion in shaky mortgages once lenders erase some of the loan amount.

On Monday, Sen. Hillary Clinton, a Democratic presidential candidate, called for the FHA to "stand ready" to rescue troubled borrowers. One of the stumbling blocks is getting policy-makers to grapple with the question of how many dollars can be sensibly spent now to avoid bigger costs in the future.