Foreclosure fix faces murky future

Senate fast-tracked legislation to stabilize housing. But Bush administration gives it low marks and House is proposing its own ideas and may even push for broader economic stimulus package.

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By Jeanne Sahadi, CNNMoney.com senior writer

Should Congress step in and help struggling homeowners refinance their mortgages?
  • Yes
  • No

NEW YORK (CNNMoney.com) -- The Senate is poised to pass a $15 billion package of housing measures intended to stabilize the housing market.

The proposed measures include a controversial tax break for homebuilders and other businesses, plus a new tax credit and deduction for homeowners and home buyers.

But the legislation - crafted in 24 hours of bipartisan negotiation last week - faces an uncertain fate.

On Tuesday, the Bush administration gave the bill the thumbs down. "The bill would likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations," White House spokesperson Dana Perino said.

The Senate package - likely to get a final vote on Wednesday - isn't getting much support in the House, which is expected to craft its own bill. The House's plans started to take shape Tuesday when Rep. Charles Rangel, D-N.Y., the chairman of the powerful House Ways and Means Committee, proposed measures that would offer tax-related housing assistance.

Further muddying the picture of what final measures Congress will settle on: House leaders have indicated they might also pursue proposals to address other problems in the economy - a move that could complicate speedy approval of any foreclosure provisions.

"This is not a quick, easy conversation to have," said Clint Stretch, managing principal of tax policy at Deloitte Tax.

But the pressure is on for lawmakers to act swiftly to prevent a substantial number of foreclosures. Nationwide, 1.5 million subprime adjustable-rate mortgages will reset to higher interest rates this year, putting many of those homeowners at risk of falling behind on their payments and losing their homes.

Critics of the Senate package say the measures do more for homebuilders and other businesses than they do for homeowners at risk of foreclosure. If House leaders have their way, the House bill will contain measures more targeted to keep troubled borrowers in their homes.

Housing agency in center ring

The House's efforts on housing have so far been led by Financial Services Chairman Barney Frank, D-Mass. Frank is scheduled to start two days of hearings on Wednesday to debate his proposal to let the Federal Housing Administration (FHA) insure $300 billion in troubled loans if lenders voluntarily write them down to at least 85% of the homes' appraised value.

The hearing will feature testimony from economists and key banking regulators, including Sheila Bair, head of the Federal Deposit Insurance Corp., and Randall Kroszner, a Federal Reserve governor.

Some political observers say that the FHA proposal may be a centerpiece of the House bill. But the Senate chose to exclude in its housing package a similar proposal from Senate Banking Chairman Chris Dodd, D-Conn.

Meanwhile, the first detailed indication of measures that could be in the House bill were proposed on Tuesday by Rangel.

Rangel's $11 billion Housing Assistance Tax Act differs from the Senate package in many ways.

One of the biggest differences: Rangel left out of his bill a controversial business tax break that the Senate has proposed. The provision - an expansion of the so-called net operating loss carryback - would extend to four years from two the time company may apply its 2008 and 2009 losses to past tax bills. The tax break would benefit homebuilders who prospered during the housing boom and now are banking big losses.

But the Rangel bill and Senate package do overlap in two key areas.

Like the Senate, Rangel would allow 28.3 million homeowners who take the standard deduction on their federal tax return to also deduct their property taxes. Currently, only homeowners who itemize can take that deduction. But the deduction in Rangel's bill is capped at $350 for single filers and $700 for joint filers, below the $500 and $1,000 thresholds proposed by the Senate.

Rangel's proposal also includes a measure letting states issue an additional $10 billion in tax-free municipal bonds, the proceeds of which may be used to subsidize mortgage refinancing for subprime borrowers trying to get out of unaffordable loans. Under current law, state and local housing agencies are only allowed to issue tax-free bonds to help subsidize mortgages for first-time home buyers or those purchasing property in distressed areas.

Rangel has also included provisions that would offset the cost of his proposal. Chief among them is an idea the Bush administration supports: requiring stock brokers to report to the IRS the cost basis of investment when a client sells stock. That change is estimated to raise $8 billion.

Stimulus 2.0 on tap?

Looking beyond the mortgage crisis, House Speaker Nancy Pelosi, D-Calif., and other House leaders will seek to put together an economic stimulus bill that is expected to contain measures that were cut from the first stimulus bill passed in February.

They are likely to call for an extension of unemployment benefits, an increase in food stamp payments and more funding for infrastructure repair. Whether such measures would be included in a housing package or passed separately isn't clear yet.

Congressional leaders are scheduled to meet with Bush on Wednesday.

"We will urge him to focus on the economy and work in a bipartisan manner on a new stimulus package to help America's working families. We must work together to restore consumer, market, and worker confidence," Pelosi and Rangel said in a joint statement Monday.

The president, meanwhile, will likely urge Congress to let the first stimulus package take effect before deciding what to do next. Taxpayer rebates, the centerpiece of that legislation, will start going out in May.

"My only advice to [Congress] is, one, make sure you give the pro-growth package that was passed overwhelmingly a chance to work, see what the effects are," Bush said Monday.

-- CNN congressional producers Ted Barrett and Deirdre Walsh contributed to this report To top of page

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