President Bush announces proposal for mortgage relief

Bush said the government has a ‘limited’ role to play.

MARKETWATCH

WASHINGTON — The White House is proposing to expand the role of the federal government to stem a wave of mortgage defaults, President Bush said Friday, unveiling a series of steps including allowing refinancing into government-insured mortgages.

Under the plan, the Federal Housing Administration’s mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages.

People who have missed mortgage payments are now ineligible for FHA insurance.

The president’s plan would allow them to be eligible for FHA insurance if the amount they are required to pay each month increases, as has happened on many adjustable loans with so-called “teaser” introductory rates.

Limited

However, Bush is rejecting a wholesale bailout of borrowers and lenders alike, saying it’s not Washington’s role to provide such a backstop.

“The government’s got a role to play,” Bush said at the White House. “But it is limited.”

A bailout of lenders, Bush said, would only encourage similar situations in the future.

“It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Bush said.

But he said many homeowners could be helped if their lenders are flexible with mortgage terms and the government offers them modest help.

Bush’s plan would reportedly allow about 80,000 homeowners to refinance their mortgage. Some groups have estimated that as many as 2 million homeowners are at risk of foreclosure.

Tax code change

Bush is also proposing a temporary change to the tax code that penalizes borrowers who refinance their mortgage terms and a new initiative aimed at preventing foreclosure.

“This is not going to reverse things,” wrote David Ader, bond strategist for RBS Greenwich Capital. “This proposal is something that may help a small slice of the market, but we don’t see it as a broad solution.”

Many other ideas have been floated in recent weeks to help homeowners who face staggeringly high payments on adjustable-rate mortgages taken out in 2005, 2006 and 2007, including giving Fannie Mae and Freddie Mac a bigger role, or even creating a new federal bureaucracy to bail out homeowners.

The Bush administration has previously asked Congress to eliminate rules requiring a 3 percent down payment and raise the size of loans that the FHA can insure, from $362,790 to $417,000, according to media reports.