Housing relief bill: It ain't over 'til it's over

Democrats lose a round in push to give bankruptcy relief to troubled homeowners, but supporters vow to fight.

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By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Senate Republicans this week thwarted efforts by their Democratic counterparts to vote on a housing stimulus bill that President Bush said would "bail out lenders and speculators."

But that doesn't mean Congress is done trying.

Democrats are likely to push ahead on legislation they argue would soften the problems caused by the growing number of foreclosures. The most controversial part of the bill would let bankruptcy judges reduce the amount of principal and interest due on some residential mortgages. Under current law, only mortgages for investment properties, vacation homes and farms may be written down for those in bankruptcy.

The lending industry has been lobbying heavily against the provision, arguing that letting judges rewrite the terms of mortgages would cause lenders to impose a bankruptcy risk premium, raising rates on all mortgage borrowers.

Some studies, however, contend the increase in rates would be minimal.

Proponents of the legislation - in particular, Sens. Sherrod Brown, D-Ohio, and Debbie Stabenow, D-Mich., who are from the states hardest hit by foreclosures - have vowed to keep fighting for the bill.

In a press conference on Friday, Brown said such a stimulus bill is needed given the speed at which Americans are losing their homes to foreclosures - 200 families a day in Ohio alone, according to Brown. And, he added, spending a few billion dollars to preserve Americans' homes pales in comparison to the estimated $3 billion a week spent on the wars in Iraq and Afghanistan. "What [the administration has] done is pitifully small relative to what we need to do," Brown said.

Added Stabenow, "We're going to keep pushing on this issue."

Senate Democrats may get help from the House, particularly on the proposal to change the way residential mortgages are treated in bankruptcy.

In the upcoming election, "Democrats will argue that Republicans sunk a housing stimulus bill that could have kept troubled borrowers in their homes without costing taxpayers a dime," wrote Jaret Seiberg, the financial services analyst for the policy research firm Stanford Group.

The House is working on its own housing stimulus bill. "Adding mortgage bankruptcy to the package may make political sense and we would not be surprised to see House leaders do it," said Seiberg.

White House to bend?

If housing conditions worsen, some say the administration may get on board with some of Democrats' proposals that include more government action.

Treasury Secretary Henry Paulson has said publicly that he wouldn't back any taxpayer-funded bailout plan. But the newspaper American Banker reported Friday that the Treasury and the Federal Reserve have been meeting with congressional aides and financial services groups to consider plans that might involve more government involvement.

"If current trends hold, yes, I think there will be some kind of intervention. ... It's fair to say Treasury officials wouldn't be spending the time to meet with different groups if they didn't feel something broader needed to happen," Jim Carr, the chief operating officer of the National Community Reinvestment Coalition, told American Banker.

What that something would be is unclear. Several plans are being proposed or considered. Some would create a government fund intended to ease the credit crunch by reviving the beleaguered mortgage-backed securities market. Some would fund state and local governments so they can buy up vacant foreclosed properties and either renovate or rebuild them for sale or rent. And others would have the government insure subprime mortgages for at-risk borrowers.

Beyond the bankruptcy measure, the Senate housing stimulus bill also includes some ideas that Bush has said he supports.

One such measure would boost the ceiling on how much in federally tax-exempt bonds state and local housing agencies may issue to help subsidize the cost of mortgages for consumers. It would also allow those agencies to use the bond proceeds to subsidize the cost of refinancing subprime loans. Currently, they are only allowed to subsidize the cost of loans for first-time home buyers and people buying properties in distressed areas. To top of page

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