Election year calculus underlies housing bill

WASHINGTON (Reuters) - The biggest housing market rescue plan yet seen from the U.S. government has won House of Representatives approval, but faces resistance in the Senate, a White House veto threat, and questions about whether it will work.

Defying the Bush administration and their own leaders, dozens of House Republicans joined Democrats on Thursday to support the plan, reflecting a desire to be seen helping homeowners ahead of November’s elections.

The plan goes next to the more closely divided Senate, where the same election-year calculus will determine whether Democrats can gather enough votes to proceed with the bill.

“It’s politically dangerous to oppose this (bill),” said Douglas Elmendorf, an economist at the Brookings Institution think tank. “There are a lot of negative forces still at work in the economy... The idea that we’re maybe out of the woods is a mistake.”

The centerpiece of the bill is a two-year program for the Federal Housing Administration (FHA) to offer $300 billion in new loan guarantees to help refinance distressed mortgages.

To participate, lenders would have to agree to forgive portions of troubled loans, while borrowers would have to meet certain indebtedness standards and pledge they did not intentionally default on a loan to obtain assistance.

The White House has vowed to veto the bill, despite its inclusion of two major provisions backed by President George W. Bush and tacit support voiced this week for another section by Federal Reserve Chairman Ben Bernanke.

The bill was put together by Democratic Rep. Barney Frank of Massachusetts.

Bush said the bill would “reward speculators and lenders,” while Republicans loyal to him threw delaying tactics at the legislation on the House floor and criticized it as a bailout.

Even if Republicans change their tune later and cut a deal on the bill in the Senate, some Wall Street analysts said the sweeping House bill is riddled with uncertainties.

“I’m really skeptical,” said Rod Dubitsky, a senior strategist in the asset-backed securities group at financial group Credit Suisse. “The Frank plan, and any FHA solution, depends on a number of moving parts.”

Brian Gardner, vice president at investment firm Keefe Bruyette & Woods, said housing markets have stabilized somewhat recently, but mostly due to moves by the Federal Reserve, not the prospect of House legislation.


A Congressional Budget Office study estimated that 500,000 borrowers could be helped under such an FHA expansion.

“If that’s the number, then it will have some kind of impact,” Gardner said, adding participation by lenders would be strictly voluntary.

“I don’t think we have a good idea of how many lenders are going to step up and participate,” he said. “I hear anecdotally there are some lenders that are balking at the whole thing.”

Dubitsky said the $300-billion FHA expansion would be big enough to help a lot of “at risk” borrowers. But he said it was unclear which borrowers exactly that includes and whether the bill’s provisions to prevent intentional defaults were adequate.

He also questioned funding for the Frank plan. Since the FHA only insures loans, funding would likely come from mortgage-backed securities (MBS) guaranteed by Ginnie Mae, the Government National Mortgage Association, Dubitsky said.

Ginnie Mae is a government corporation that stands behind MBS pooled from FHA mortgages. Any MBS created under the Frank plan would likely be greeted differently by the market than typical Ginnie Mae instruments. “Investors’ appetite on these securities will be a big question mark,” Dubitsky said.

Demand among investors so far has been tepid for Ginnie Mae securities issued under FHA Secure, a program launched last year by Bush to help troubled homeowners, he said.


The Frank bill has tax measures, as well. It would offer a $7,500 tax credit to low-income, first-time home buyers and give homeowners who do not itemize their tax returns a property tax deduction.

Jaret Seiberg, policy analyst at the financial firm Stanford Group, said the tax credit “offers another incentive for new buyers to enter the market.”

But the tax credit won’t halt the downward spiral in U.S. home prices and falling demand hurting the economy.

The bill “would help a goodly number of households to stay in their homes ... It would not arrest the decline in house prices, nor should it,” said Brookings’ Elmendorf.

“It would not bring clarity to all the risks in financial markets ... I don’t think people should be expecting that.”

Two additional measures -- both backed by Bush and both passed earlier by the House -- are included in the bill. One would overhaul regulation of housing finance giants Fannie Mae and Freddie Mac; another would raise the limit on the size of mortgages the FHA can back.

In the Senate, the Frank legislation will encounter deep disagreement among lawmakers, including Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Alabama’s Richard Shelby, the committee’s senior Republican.

Last month, the Senate overwhelmingly approved a $15-billion bill offering mostly tax breaks to corporations hurt by the housing slump. It passed only after a controversial provision to modify bankruptcy law in favor of homeowners was dropped in the face of stiff Republican opposition.

Additional reporting by Patrick Rucker; Editing by Tim Dobbyn