Senate panel passes housing rescue plan

The U.S. Senate Banking Committee approved legislation on Tuesday that could save a half million homeowners from fore closure and help stabilize the nation's rattled housing market.

Under the plan, lenders who agree to erase a large share of the original loan amount could win a government guarantee on future mortgage payments. The bill would also create a stronger regulator for mortgage-finance companies Fannie Mae and Freddie Mac.

Both the Senate bill and a similar plan passed by the House of Representatives earlier this month would create a fund under the Federal Housing Administration to allow distressed homeowners to refinance into government-guaranteed loans.

Congress is trying to stem a wave of foreclosures estimated at about 1.4 million this year with home prices falling and many borrowers unable to make payments on costly mortgages taken out before the real estate bubble burst.

Senate Republicans and the White House had worried a new FHA program would put taxpayers on the hook for failing loans. But under the compromise bill passed by the Senate panel, Fannie Mae and Freddie Mac will absorb loan losses.

The bill that cleared the Senate committee on Tuesday now must go before the full Senate for a vote. If approved, lawmakers will need to hammer out a compromise between the competing House and Senate versions.

Rep. Barney Frank, chairman of the House Financial Services Committee and the author of the House legislation, said he had questions about how the Senate plan would fund mortgage rescues. But he said he expects lawmakers from both chambers to agree on a bill that can go to President George W. Bush.

Democratic Sen. Christopher Dodd of Connecticut, chairman of the Senate panel, has said he hopes to see the mortgage rescue package reach Bush by July 4.

While the White House had threatened to veto the House bill, it said it will take a close look at the Senate version.

"I don't believe the president will veto this," Sen. Richard Shelby of Alabama, the top Republican on the banking panel, told reporters after the vote.

DIFFERENT PLANS

The foreclosure prevention plan that cleared the House could assist about 500,000 borrowers at a cost to taxpayers of about $1.7 billion, according to the nonpartisan Congressional Budget Office.

The White House objected specifically to the cost of the House plan and Shelby demanded that its sponsors find a way to fund it without tapping governmen coffers.

After weeks of haggling, Shelby and Dodd agreed to scale back the FHA refinancing fund so it would cost only about $500 million. Dodd said the bill would still help a similar number of homeowners as the House version.

The Senate bill would cover the cost of the program by diverting money from an affordable housing trust fund to be set up under Fannie Mae and Freddie Mac.

Under the trust fund proposal, the two companies would contribute a share of their profits to create a pot of money for housing advocacy groups to expand affordable housing.

The affordable housing trust fund was a key element in the housing rescue package authored by Frank, who said he was concerned about the Senate plan to divert those funds.

"A fight is brewing on the affordable housing trust fund," the Massachusetts Democrat said. "That would be one of the most contentious issues between us ... So we will deal with that."

Freddie Mac's chief financial officer said the company is "generally supportive" of the legislation.

Speaking at a Lehman Brothers conference in London via Webcast, Buddy Piszel said, however, that the new regulator for Freddie Mac and Fannie Mae should maintain the companies' funding flexibility as they are the main sources of stability in "the worst housing downturn anyone has ever seen."

A spokesman for Fannie Mae said the company was concerned that the legislation might put a crimp in its ability to invest in the nation's housing market.

Bank's mail jingles as borrowers walk: James Saft

Increasing numbers of Americans are simply walking away from their houses and mortgages, increasing pressure on banks and the economy.

Rapid house price falls in many parts of the United States will soon leave as many as one in five borrowers owing more on their loan than the house will fetch, removing at a stroke the single most powerful incentive to keep up with payments.

The phenomenon of "walk aways" or "jingle mail," so called because of the noise the house keys make in the envelope mailed to the bank, is hard to measure but shows every sign of gathering pace and having a substantial impact.

Wachovia Corp went so far as to change its models on how quickly loans will go bad in the face of what it called "unprecedented" changes in consumer behavior.

"I don't know where the tipping point is, but somewhere when a borrower crosses the 100 percent loan to value, somewhere north of that their propensity to just default and stop paying their mortgage rises dramatically and really accelerates up. It's almost regardless of how they scored, say, on FICO or other kinds of credit characteristics," Wachovia chief risk officer Don Truslow told analysts on a conference call.

FICO, a credit score developed by Fair Isaac Corp., is one of many barometers of credit worthiness used in home lending to help predict the likelihood that a borrower will repay.

Wachovia this week announced that it would make a $2.8 billion provision for credit losses as it posted a first quarter loss, cut its dividend and sought to raise $7 billion in fresh capital.

While the law varies from state to state, in many parts of the United States mortgage lenders cannot go after defaulting borrowers' other assets. And even where they can, few lenders take the expensive and low-yielding option of chasing down borrowers who walk away from loans.

The scale of the potential problem is huge.

Mark Zandi of Moody's Economy.com estimates that 10.6 million homeowners will have zero or negative equity by the end of June, or 21 percent of first mortgage holders.

The impact of a new wave of defaults will also be potentially important. Banks and other investors in mortgages, as has been seen, will take further hits to their already weakened capital.

While few might shed tears for banks, this means a longer and deeper credit crunch. It will also mean a wave of new properties hitting the real estate market, driving prices lower still, as banks seize and seek to sell the houses homeowners have fled.

To give a flavor of the impact, Zandi has estimated that every foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent.

GROWING PHENOMENON

To be fair, not every loan default by someone whose house isn't worth as much as the loan is a walk away, but the two are closely linked. Wachovia is far from alone in feeling the impact from "walk aways."

Regions Financial Corp (RF.N: Quote, Profile, Research), a large U.S. bank active in the southeast, on Tuesday announced that nonperforming assets had nearly tripled to $1.2 billion, driven in part by deterioration in its home equity loan portfolio.

Regions chief executive C. Dowd Ritter gave analysts a similar picture of how borrowers react when confronted with steep drops in home valuations.

"As they started to sell it or refinance, they realized that valuation was 40 percent below what it was that 18-24 months ago and they are walking away from those homes in those markets," he said.

Data from real estate firm RealtyTrac not only shows a rapid rise in overall foreclosures, but also suggests a rising number of walk aways.

Home foreclosure filings surged 57 percent in the 12 months to March and bank repossessions soared 129 percent from a year ago, according to RealtyTrac.

In most of the United States, foreclosures follow a sequence of an initial notice of default, then notice of a scheduled auction, and finally a "REO" filing indicating repossession.

If borrowers walk away, lenders can skip the auction notice and accelerate repossession.

"On a year-over-year basis, default notices were up nearly 57 percent and bank repossessions were up nearly 129 percent, but auction notices were up only 32 percent, indicating that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender," said James J. Saccacio, chief executive officer of RealtyTrac.

While borrowers acting in their own best interests really shouldn't shock anyone, the costs associated will be just another unwelcome drag on the economy and finance until the value of U.S. houses stops falling.