WASHINGTON -- A sprawling bill that reaches deep into the U.S.
housing industry is close to becoming law, in what will likely stand as the federal government's most expansive effort to
stabilize the mortgage and financial markets.
The bill, which began seven months ago as a modest
attempt to help struggling homeowners, will now likely touch a vast array of borrowers, lenders, and investors: from owners
in Colorado facing foreclosure to community banks in California
and investment banks on Wall Street.
The package could also come at a significant cost
to the U.S. government, which would be authorized to invest
billions of dollars in troubled mortgage giants Fannie Mae and Freddie Mac, as well as insure up to $300 billion in refinanced mortgages. As a result of the bill,
Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion. It will also give Fannie Mae and Freddie
Mac a new, tougher regulator.
The legislative effort began in earnest after
the Christmas recess with a measure to help roughly 500,000 homeowners avoid foreclosure. Since then, several of the country's
most influential financial institutions, including Bear Stearns Cos., Countrywide Financial Corp. and IndyMac Bancorp, either
collapsed or were sold at fire-sale prices.
Lawmakers and the Bush administration cobbled
together a legislative response that became more ambitious at each turn, culminating with the rescue plan for the twin mortgage
giants. The bill temporarily increases the Treasury Department's potential line of the credit to Fannie Mae and Freddie Mac
from $2.25 billion to an unlimited amount. It would allow the government to bulk up regulation of Fannie Mae, Freddie Mac
and the 12 Federal Home Loan Banks -- something critics of those institutions have been pushing for more than a decade.
Fannie, Freddie and the FHA accounted for
about 90% of U.S. home mortgages originated in the second
quarter, the highest level in at least 50 years and up from 49% a year earlier, according to Inside Mortgage Finance, a trade
publication. Fannie and Freddie buy home loans from lenders, turn those loans into mortgage-backed securities and sell the
bulk of the securities to other investors. The FHA insures lenders and loan investors against losses on defaults.
The legislation provides a federal backstop for
the two companies, a move prompted by broad worries that both might falter, a scenario that would cripple the housing market
and envelop other financial institutions. Buyers of bonds issued by Fannie and Freddie range from small community banks to
foreign central banks.
The biggest boost for homeowners is a program
that would allow the FHA to back the refinancing of as much as $300 billion in home loans for distressed borrowers. Under
this plan, the lender or investor holding the mortgage would have to accept at least a 15% write-down in the value of the
previous loan. The new mortgage would then receive federal backing.
Mark Zandi, chief economist at Moody's Economy.com,
said the legislation doesn't provide any miracle cure for the housing market, but a defeat "would have been catastrophic."
He still expects the average nationwide house price to fall another 10% or so between now and next April or May. Then he expects
prices to bottom out and begin a gradual recovery. He expects that about 1.25 million American households will lose their
homes to defaults in both 2008 and 2009.