Help from US Congress for housing credit crisis?

Capitol Hill weighs fixes to lending industry, but divergent views on market regulation may limit results.

By Peter Grier | Staff writer of The Christian Science Monitor

from the August 27, 2007 edition

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WASHINGTON - As home foreclosures continue to spread across the nation, Washington has begun debating what – if anything – it should do to stop the credit crisis of 2007 from inflicting further damage on the US economy.

But given the complexity of the problem and the capital's division of political power, it's not clear whether this debate will produce much more than some regulatory tweaks and lots of three-point position papers.

"This is not something for which there is an obvious legislative corrective," says Thomas Mann, a senior fellow in governance studies at the Brookings Institution in Washington.

In political terms the housing crunch has given Democrats a subject with which to question the Republican White House's stewardship of the economy.

To Democrats, it's about basic principles. Tougher oversight of mortgage lenders and brokers might have helped stave off some foreclosures, they say.

Most mortgages used to be made by banks and savings and loans – deposit-taking institutions tightly controlled by state and federal regulators. But in recent years unregulated mortgage companies have greatly increased their share of the business.

These unregulated entities are to blame for many of today's imprudent loans, say some Democrats.

"The subprime [mortgage] crisis demonstrates the serious negative economic and social consequences that result from too little regulation," wrote Rep. Barney Frank (D) of Massachusetts, chairman of the House Financial Services Committee, in an Aug. 20 op-ed in The Financial Times.

Many Republicans, on the other hand, oppose actions that they see as interference in the operation of financial markets. In recent days administration officials have also emphasized that the performance of the overall economy remains strong, and that now is not the time to panic.

Indeed, the Commerce Department on Friday reported that sales of new homes perked up 2.8 percent in July. Factory orders for big-ticket items increased 5.9 percent in July as well – the biggest such increase in 10 months.

"We are going to work through this problem just fine," said Treasury Secretary Henry Paulson in a Aug. 22 broadcast interview.

There are some small steps on which political consensus seems possible. President Bush has called for increased financial education for home buyers, for instance – and Democrats are unlikely to disagree.

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