Days before the presidential election, there are signs of a division within the Bush administration over whether to announce a program to help homeowners avoid foreclosure that is similar to one proposed by Republican candidate John McCain.
Federal Deposit Insurance Corp. Chairman Sheila Bair has been outspoken in her support of a plan to extend help to homeowners who are underwater, which means that the homeowner owes more on his mortgage than his house is worth.
She has advocated for such a program for months and told Congress last week that her agency is “working closely and creatively with Treasury” to use part of the $700 billion economic rescue package for such use.
But as reports have surfaced in the press that the administration is close to announcing a plan that would help 30 million homeowners and use $40 to $50 billion of taxpayer money, the White House and Treasury Department have put on the brakes.
“We’ve been reviewing a number of housing proposals for some time and no decisions have been made on any of them. Any inference that we’re ‘nearing’ a decision on any one of them is simply wrong,” said White House deputy press secretary Tony Fratto.
Treasury spokeswoman Brookly McLaughlin said the same thing.
“No specific option has been decided on. It’s very premature to assign any numbers to any of the proposals,” she said.
FDIC spokesman Andrew Gray also said that “it would be premature to speculate about any final framework or parameters of a potential program.”
But sources indicated that officials within FDIC may be floating trial balloons in the press. Mr. Gray denied this was the case.
Ms. McLaughlin said of Ms. Bair’s proposal for homeowner help, outlined in general terms to Congress last week: “Of course we’ll look at it.”
Mr. McCain’s top economic adviser was cautiously optimistic about talk of a proposal, though he said he had not “been able to sort out what they’re talking about.”
Press reports in the Washington Post indicate that the FDIC’s plan would use taxpayer money only to compensate lenders if homeowners defaulted on renegotiated loans, and that the lenders would have to take the loss themselves of renegotiating the loan.
Douglas Holtz-Eakin, Mr. McCain’s economic guru, said a program to help homeowners avoid foreclosure would be “a step in the right direction” but that he would need to see the details of any such proposal.
“if they make an announcement we’ll want to look closely at it,” he said.
Mr. McCain proposed at the final presidential debate to renegotiate loans for homeowners who cannot afford their mortgage, and use $300 billion from the rescue plan to cover the losses between the original cost of the home loans and the renegotiated price.
Under Mr. McCain’s plan, the government would pay the banks the face value of the mortgage and absorb the difference between the original mortgage balance and the modified mortgage. Mr.McCain also indicated that the government might subsidize the interest rate.
Sen. Barack Obama would require all companies participating in the Treasury’s $700 bailout plan to initiate a 90-day moratorium on all foreclosures, provided the homeowner was “making a good-faith effort” to pay his mortgage. Mr. Obama also strongly advocates allowing bankruptcy judges to modify the terms of a mortgage for a primary residence.
Mr. Obama has also urged the Department of Housing and Urban Development and the Treasury Department to be more aggressive in pursuing mortgage modifications by reducing the principal or lowering the interest rate.
For taxpayers who do not itemize their deductions, Mr. Obama has proposed a refundable Universal Mortgage Tax Credit equal to 10 percent of the homeowner’s mortgage-interest payments. He has promised to fast-track this tax provision if elected.
There are currently about 55 million residential home loans in the U.S.
So far, the administration has earmarked $250 billion of the $700 billion bailout funds for the purchase of preferred stock in banks. Other financial institutions, including insurance companies and auto-finance companies, are looking for a share. Congress has leverage because the administration must get congressional authorization to spend any amount above $350 billion.