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New bailout focus: how to fight foreclosures

The government will help homeowners restructure shaky mortgages financed by Fannie Mae and Freddie Mac, but partisan debate looms over how to keep up the aid.

By Staff writer of The Christian Science Monitor / November 13, 2008

Lifeline: Randy and Cindy Balzer nearly lost their Pittsburgh home before cutting a deal with their lender. Regulators aim to help other homeowners with risky US-backed mortgages.

lake fong/pittsburgh post-gazette/ap

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First came Wall Street. Now Washington is turning more of its attention to Main Street, as the federal government moves to try and rescue more mortgage holders in financial trouble.

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On Nov. 11, administration officials announced a plan for refinancing delinquent loans held by Fannie Mae and Freddie Mac, the giant government-controlled mortgage companies. The move could lead eventually to lower payments for hundreds of thousands of homeowners.

But the future extent of Uncle Sam's housing bailout remains a major open question. The new plan is all well and good, say critics, but it does not affect millions of strapped subprime borrowers whose loans aren't controlled by Fannie and Freddie.

Political tension over this issue seems sure to arise in the coming transition period. Key Democrats want to use cash from the already-passed $700 billion financial rescue bill for a larger mortgage-rescue program. The man who controls that pot of money, Treasury Secretary Henry Paulson, isn't sure that's such a good idea.

New mortgage aid would constitute direct government spending, said Mr. Paulson on Nov. 12. The financial-rescue money, by contrast, is supposed to go for investment, albeit in troubled financial institutions.

"We continue to explore further ways to reduce the risk of foreclosures," said Paulson.

The concept of aid for troubled homeowners isn't what is at issue. Almost everyone involved insists that the current troubled economic period won't end until housing prices bottom out and homeowners – plus their lenders – feel financially stable once again.

The difference is over the approach. Should it be one of limited government intervention, plus a push to get the private sector to do more? Or should it be more controlled by the government? In that sense, the clash may be a classic one of Republican versus Democratic market sensibilities.

The target is the troubled homeowner whose loan has some hope of being salvaged, said Rep. Barney Frank (D) of Massachusetts, head of the House Financial Services Committee, at a Nov. 12 hearing.

"There is zero likelihood that federal tax dollars will go to those who hold loans that should never have been made in the first place," said Mr. Frank, who will play a key role in developing policy for congressional Democrats on the issue.