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| The rise in foreclosed homes like this one in Pasadena, Calif., could cause home prices to drop 6 percent next year, economists
say. Reed Saxon/AP/file |
U.S. moves to stem wave of foreclosures
Steps by Congress and the Fed will ease the problem, but not cure it, experts say.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the September 20, 2007 edition
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This week, in response to a record and rising pace of foreclosures, Washington is offering the first signs of legislative relief.
As the Federal Reserve cut interest rates by a surprising half percentage point Tuesday, Congress has begun moving on the first of several bills to help at-risk homeowners. Votes this week involved the expansion of federal insurance for home loans.
Even so, neither the Fed nor Congress appears likely to contain the foreclosure wave that is on pace to hit 1 million or more homeowners next year.
Rate cuts by the Federal Reserve, after all, can go only so far toward resolving issues that extend far beyond the price of credit. Over time, Fed rate cuts should help open the money spigot for people buying or refinancing homes. But Tuesday's reduction in the federal funds rate to 4.75 percent doesn't mean mortgage rates will fall immediately by that amount.
And even boosters of legislative action see the new bills as initial steps.
What the policy moves might do is make the rise in foreclosures less severe.
"It'll probably make a dent in that number, but just a dent," says Patrick Newport, a housing expert at Global Insight in Lexington, Mass.
Brian Montgomery, who heads the Federal Housing Administration, says more than 200,000 homeowners could be helped by the new legislation regarding the FHA, according to an Associated Press report.
The House of Representatives passed its bill with broad bipartisan support Tuesday. A similar measure was under review in the Senate Wednesday. The House bill would allow the FHA, which insures mortgages for low- and middle-income borrowers, to back refinanced loans for borrowers who fall behind on payments when adjustable-rate mortgages reset from low initial levels.
The Bush administration also backs the concept, but the two sides have been sparring over how far to boost the price limit on FHA-covered loans.
Such insurance, by providing a federal guaranty against default, helps lenders feel safe in extending credit, as homeowners seek to refinance into mortgages with more manageable interest rates.
Legions of borrowers, however, have a problem that the legislation doesn't directly address: Their homes are "under water," Mr. Newport says, meaning the homes are now worth less than the balance on the loan. In such cases, even an FHA guaranty and the desire of lenders to avoid the costs of foreclosure don't open the door to refinancing.
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