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.
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.
"Prices are dropping a lot," he says, in four key states: California, Arizona, Nevada, and Florida. The buyers who bought near the price peak, in 2004-2006, were also the most likely to hold the riskiest mortgages. These loans featured big resets and were made with little or no down payment.
Some housing experts, in fact, say that federal policymakers should do much more, given the scope of the problem.
"We've got a crisis," says Jeffrey Lubell, executive director of the Center for Housing Policy, a Washington, D.C., research group. The proposed expansion of federal insurance for loans is "a good start but is not aggressive enough."
And, he says, the rate cut offers reassurance but not a solution.
"It will get more credit flowing," he says. But "it doesn't ultimately forestall the foreclosures that are going to happen."
Any housing-crunch relief, whether provided by politicians or the central bank, raises difficult questions of how far officials should go toward a bailout of private-sector lenders and borrowers who, by many accounts, acted unwisely.
Congress, the White House, and the Fed are all navigating that issue cautiously. The Bush administration, for one, is wary of any moves that would make taxpayers liable for a big housing rescue. But none of these parties is taking a do-nothing approach. Several reasons stand out:
•Many at-risk homeowners didn't realize the risks they were taking. Many others, it's true, were buyer-investors, who knowingly took loans with risky terms. But often mortgage brokers focused borrowers on the initial "teaser" interest rate, or promised that borrowers could refinance later to avoid a steep reset.
•Lenders and borrowers are paying a price already. Foreclosure rates have risen to record levels, and some mortgage companies have collapsed. This week the largest home lender, Countrywide, said it has virtually exited the business of making subprime loans to people with poor credit histories.
•The risks to the economy have grown in recent weeks. Foreclosure is just one of the forces affecting home prices. But economists at Goldman Sachs estimate that the rise in foreclosures over the past year translates into a decline in home prices of about 6 percent by next year. A continued decline in home prices could affect consumer spending.
Such a decline also threatens to further expand the number of foreclosures. If home prices are falling, more recent buyers go "under water." If a rate reset pushes them into default, they can't pay off their loan by selling the house.Congress is also mulling other moves, including letting two government-created agencies, Fannie Mae and Freddie Mac, buy risky loans once they're renegotiated, to keep borrowers in their homes. Another proposal is to enable bankruptcy judges to adjust loan terms. Mr. Lubell says other steps should include more money for nonprofit foreclosure counseling and the creation of innovative mortgage products for homeowners at risk.