Bush proposes steps to deal with mortgage crisis

By Tabassum Zakaria

WASHINGTON (Reuters) - President George W. Bush on Friday tried to calm financial market turmoil from the credit crisis by announcing proposals intended to prevent homeowners from defaulting on risky mortgages.

Rising U.S. defaults on so-called subprime mortgages to less credit-worthy borrowers have caused volatility in financial markets around the world and raised concerns that the U.S. economy could fall into recession.

In trying to soothe those worries, Bush said the U.S. economy was healthy enough to weather the credit crisis and that the subprime market problems represented only a "modest" part of the economy.

"The recent disturbances in the subprime mortgage industry are modest, they're modest in relation to the size of our economy," he said.

But he emphasized that it was not the federal government's job to bail out the mortgage lending industry, a comment that caused U.S. stock prices to pare gains.

"The government's got a role to play. But it is limited. A federal bailout of lenders would only encourage a recurrence of the problem," Bush said in a statement in the Rose Garden.

On Capitol Hill, Democratic lawmakers took issue with Bush's stand-back approach and urged more direct action to protect homeowners who may not realize the pitfalls they face as their adjustable-rate mortgages reset with higher rates that push monthly payments up.

"Homeowners are being ripped off by brokers and lenders skilled at deceiving borrowers," said Senate Banking Committee Chairman Christopher Dodd.

Dodd offered support for a proposal to let the Federal Housing Administration refinance more distressed homeowners but said Bush had "sat on his hands" too long before acting.

Democratic Sen. Charles Schumer of New York similarly said that Bush needed to endorse new laws to prevent mortgage brokers from steering poorer Americans into inappropriate loans.

Schumer reiterated that investment limits on mortgage lending giants Fannie Mae and Freddie Mac should be raised so they can buy more mortgages, a position the Bush administration opposes.

At a central bankers' symposium in Jackson Hole, Wyoming, Federal Reserve Chairman Ben Bernanke made clear that he was following what analysts have described as a "tough love" policy toward borrowers and especially toward lenders.

"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions," Bernanke said.

Bush urged lenders to work with homeowners to renegotiate their mortgages to prevent default.

He called on Congress to approve legislation he proposed last year to modernize the Federal Housing Administration (FHA), which provides mortgage insurance to borrowers through a network of private-sector lenders.