Senate reaches foreclosure relief compromise

Senate reaches foreclosure relief compromise

Green light flashes as Democrats agree to drop plan, opposed by Republicans, that would have given judges power to cut interest rates.

WASHINGTON (AP) -- A legislative effort to address the nation's home foreclosure crisis moved forward in the Senate Tuesday as Democratic and GOP leaders defused a potential filibuster.

Majority Leader Harry Reid, D-Nev., and GOP Leader Mitch McConnell of Kentucky agreed to bring a bipartisan bill to the floor as early as Wednesday instead of a Democratic plan that stalled a month ago.

Instead, Senate Banking Committee Chairman Christopher Dodd, D-Conn., and the panel's top Republican, Richard Shelby of Alabama, were instructed to forge a compromise by Wednesday afternoon.

Senators in both parties gave the arrangement a 94-1 stamp of approval on a previously scheduled procedural vote. Jim Bunning, R-Ky., was the sole "nay" vote.

The move, senators and aides said, likely means dropping a Democratic plan -- strongly opposed by Republicans and President Bush -- to give bankruptcy judges power to cut interest rates and principal on troubled mortgages. Chief sponsor Richard Durbin, D-Ill., is pressing a modified version aimed at easing opposition from banks and Republicans and hoped it might still be included in the measure; at the least, he'll seek to add it on the floor.

The hotly-contested provision rewriting the bankruptcy code, opponents say, would allow borrowers to effectively rewrite their mortgage contracts and would prompt lenders to tighten their standards and raise interest rates.

The legislation is likely to draw on elements of the Democratic plan such as letting states issue $10 billion in tax-exempt bonds to refinance subprime loans and permitting homebuilders and other money-losing businesses to reclaim previously paid taxes.

Democrats also want to provide $4 billion to states to buy up and refurbish foreclosed homes, a plan that the administration opposes as a bailout for lenders and speculators.

The upcoming bill also is sure to attract a GOP amendment by Sen. Johnny Isackson of Georgia to award $15,000 tax credits to people who buy and move into foreclosed homes. That would sharply boost demand, Isackson says. Lawmakers in both parties support the idea

The measure is also likely to include a plan by Dodd to have the Federal Housing Administration guarantee hundreds of billions of dollars worth of refinanced loans if lenders reduce loan amounts to reflect reduced home values. The measure would force banks to make less money on the loans but would also reduce their credit exposure.

Tuesday's developments don't guarantee a successful result, but both parties are under great pressure to produce a bill that can pass this year. There's enough common ground for a bill, even though difficult negotiations remain on several fronts.

"Inaction is never an option when you have a crisis of confidence in the housing market and the financial market," Shelby said. "The American people are looking to the Senate right now to see how we're going to react to it."

There is also bipartisan backing for new money for debt counselors to help homeowners negotiate with lenders.

The developments come on the heels of steps by the Federal Reserve to broker the 11th-hour sale of a major investment firm, the failing Bear Stearns Cos., (BSC, Fortune 500) to a rival. It guaranteed some $30 billion in Bear assets, including questionable mortgage-backed investments. The central bank also allowed investment houses to get emergency loans previously reserved only for commercial banks.

Dodd said that about 8,000 homes are being foreclosed on every day.

"Foreclosures of this magnitude are on a par with the severity of foreclosures during the great Depression," Dodd said. "Each day without action means more are losing their homes."

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Mortgage fix - The clock is ticking

Senate lawmakers reached a deal on Tuesday that could expedite help for the troubled housing market. But hurdles remain and time is running out.

NEW YORK (CNNMoney.com) -- The Senate, in a surprise move, has agreed to work out a bipartisan housing package that could come to the floor as soon as Wednesday.

Such deals - quickly brokered between Democratic and Republican leaders - will have to be the order of the day in both the Senate and the House if lawmakers hope to stem foreclosures this year.

Indeed, Congress is facing a deadline: Housing experts say that bills must get signed into law by July and take effect no later than the third quarter to prevent a substantial number of foreclosures this year.

Nationwide, 1.5 million subprime adjustable-rate mortgages will reset to higher interest rates this year - with May and June being peak months, said Rick Sharga, a spokesman for Realty Trac, an online marketer of foreclosure properties.

Many of those borrowers are vulnerable to foreclosure either because their monthly payments will become unaffordable when the rate changes, or they already are having trouble making their payments.

Foreclosure filings typically are issued after a borrower has been in default for 90 days. Those borrowers then usually lose their home within three to four months if they can't work out a deal with the lender or find a way to pay what they owe. Translation: Those whose loans reset in May and June could be in the foreclosure process by September and lose their home by the end of the year or early in 2009, Sharga said.

Election-year pressure

Congress also faces intense political pressure to reach a compromise soon.

"If lawmakers cannot do this by the July 4th recess, then it will be tough to ever get it finished," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm. "Attention in July will move squarely to the presidential election and it will become increasingly hard to reach any type of bipartisan accord," he said.

The bipartisan Senate housing package, which hasn't been written yet, could be presented as early as Wednesday afternoon. It could be made as an amendment to a Democratic housing bill that was blocked by Republicans in a vote a month ago.

The most controversial part of that bill - a provision that would let bankruptcy judges write down the principal and interest on residential mortgages for Chapter 13 filers - is likely either to be much modified or eliminated altogether from the bipartisan package.

Republicans strongly objected to the bankruptcy measure, contending it would increase the costs of mortgages for everyone since lenders would price in more risk if they knew a third party could alter the loans' terms. Some studies have shown, however, that cost increases would be minimal.

The Democrats' bill also included a provision that would give $4 billion in grants and loans to states and local governments to buy and refurbish foreclosed homes. The White House has said it considers such a provision a bailout for lenders.

The Senate's agreement to compromise on Tuesday doesn't mean lawmakers will successfully broker a bipartisan package quickly.

"It's not clear to me that they've reached a deal - it seems they've reached a procedural deal," said Brian Gardner, a political analyst with Keefe, Bruyette and Woods.

And even if they do, lawmakers on the other side of the Capitol will still have to weigh in.

On the House's docket are Financial Services Committee hearings next week to consider a proposal from that committee's chairman, Barney Frank, D-Mass., to let the Federal Housing Administration insure mortgages for troubled borrowers if lenders voluntarily write them down to an affordable level for the borrower.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., also supports the idea and may introduce his own bill.

Whether Congress will be able to stimulate the housing market and help borrowers avoid foreclosure can only be known once a final deal is struck. In the meantime, the clock is ticking.

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