House Democrats eye government mortgage buyouts

By Kevin Drawbaugh

WASHINGTON (Reuters) - As the U.S. government edges toward a more forceful response to the housing market crisis, a senior Democrat on Wednesday said a bill being created may call for federal purchases of distressed mortgages.

House of Representatives Financial Services Committee Chairman Barney Frank said the bill from House Democrats may be unveiled next week to tackle what he called the worst housing slump since the Great Depression of the 1930s.

The government is scrambling to stem a wave of failing loans as the rate of new foreclosures hits a record level and millions of marginal borrowers struggle to make payments on home loans that were offered under lax credit terms.

Frank's remarks came on the same day that Treasury Secretary Henry Paulson reiterated opposition to a government entity to buy distressed mortgages -- an idea proposed by Senate Banking Committee Chairman Christopher Dodd.

Paulson told a House committee hearing that he would prefer continuing to rely on private-sector initiatives, such as the Hope Now program, in which mortgage lenders work out troubled mortgages with easier terms, one borrower at a time.

Such steps are meant to ease the blow on homeowners and the economy from a deflating home price bubble. But Frank said the Bush administration and Congress need to do more.

"If the president continues to insist that we don't do anything beyond Hope Now, then we're going to have a longer and deeper economic problem than is necessary," Frank told reporters after meeting with House Speaker Nancy Pelosi and a group of prominent economists and former government officials.

BIG LOSSES

Major Wall Street banks have taken multibillion-dollar write-downs as home loans made as recently as mid-2007 go bad.

Federal Reserve Chairman Ben Bernanke said on Tuesday that banks may have to write down the principal of some troubled home loans to ward off greater losses from foreclosure.

California's Pelosi and Massachusetts' Frank, both Democrats, met with some of the same economists in December, including former Treasury Secretary Lawrence Summers.

Despite sharp interest rate cuts by the Federal Reserve, Summers said, "The outlook for the economy, on a consensus basis, probably looks bleaker today" than at the time of that December meeting.

After the meeting with Pelosi, Summers called for "vigorous approaches with respect to broad problems in the credit markets that are now affecting the municipal markets ... the student loan markets, as well as spreading into other sectors."

Another economist who was in the meeting, Mark Zandi of Moody's Economy.com, said: "The economy is contracting. It's well on its way to recession ... The fundamental problem is what's going on in the housing and mortgage markets."

He praised a $168-billion, two-year economic stimulus plan approved last month by Congress and President George W. Bush, which contained some housing help, as well as Hope Now.