With more and more homeowners facing foreclosure, our legislators are looking into ways to stem the tide. Congressional efforts to let the government offer more aid to struggling homeowners are being spearheaded in the Senate Banking Committee. The plans would also overhaul how Fannie Mae and Freddie Mac are regulated.

Recent actions by the Fed and JP Morgan Chase to bail out the beleaguered Bear Stearns for billion in federally insured may be part of the impetus for the bill sponsored by Committee Chairman, Sen. Christopher Dodd (DCT). Wall Street averted a possible disaster with the bail out, and many politicians feel the same is necessary for Main Street, USA.

In this plan, the Federal Housing Administration (FHA) would be allowed to back mortgages of borrowers at risk of foreclosure if the lenders voluntarily write them down to an affordable level. Perhaps most importantly, it would allow borrowers with hybrid adjustable rate mortgages to refinance into fixed-rate mortgages.

Resistance to the plan comes mostly from Republicans, headed by Sen. Richard Shelby (R-Ala). Opponents claim that the plan is just a bail out for imprudent lenders and homeowners. Once again, the Bear Stearns action is cited as argument for why this legislation should be enacted.

The plan also claims to factor in that many homes that are facing foreclosure have also lost much of their value due to community and area-wide declines in real estate values. Wall Street averted
a possible disaster
with the bail out, and
many politicians feel
the same is necessary for
Main Street, USA. In declining markets, many homeowners are upside-down on their mortgages. That is, the amount they owe on the home is more than the current market dictates the home is worth.

This is the prime argument that asserts that this plan is not a bail out of lenders and borrowers who employed bad practices, but instead will serve to stabilize communities hit hard by declining real estate markets.

In parts of the country where home prices are dropping, Fannie Mae is doing away with higher minimum down payments. Fairfield County has been designated as one of these areas. The move is said to be part of Fannie’s efforts to help resuscitate the ailing mortgage market. Effective June 1, under pressure to relax lending policies, Fannie Mae will now require between 3% and 5% for all the loans that it guarantees.

Freddie Mac, Fannie Mae’s smaller brother has recently posted lowerthan- expected losses with new accounting practices. It was expected that they would post a loss of at least .7 billion. The changes in how the company values certain assets that aren’t traded brought that number down to .3 billion.

Some analysts and researchers consider the change in the accounting practices as superficial, or likened to “putting lipstick on a pig,” but the changes were deemed to have a positive effect reducing the volatility in the billion in securities, derivatives, and mortgage holdings and subsequent trading reflected the reduced risk with the stock posting positive gains.

It is possible that the specter housing rescue legislation and changes in policy at Fannie Mae and Freddie Mac are already changing consumer activity nationwide. Mortgage application volume rose 2.9% during the week ending May 9, according to data released by the Mortgage Banker’s Association in their weekly market survey. We’ll know in the upcoming months if the housing relief legislation will pass and whether or not it will affect the markets.

It is estimated that the number of households that will benefit from the proposed legislation stands around 500,000. While legislators estimate the total number of homeowners who could potentially benefit from the newly penned legislation to be well over one million, it is unknown how many banks and lenders will be willing to lower the amount of principle owed on a home of atrisk borrowers, thereby lowering the number of people who might be able to save themselves from foreclosure.

Heavy caseloads and intermediary servicers may also keep the maximum potential foreclosure risk borrowers from capitalizing on the proposed legislation. A similar situation has occurred recently where the Fed has lowered the prime interest rate and banks in attempts to recover funds have not translated the lowered rate to the consumer.

Even if Sen. Dodd’s bill does receive the necessary votes to be passed by the Senate Banking Committee, whether or not President Bush will sign the bill remains in question. He has already threatened to veto a very similar bill proposed by Rep. Barney Frank (D-Mass), which has already passed a house vote.

Although it may seem that President Bush will be vetoing any proposed bill presented by the Democratic senator, pressure has been building in Washington to address the mounting numbers of foreclosures in America’s hardest hit neighborhoods. There are at least 23 Republican senators from states with counties suffering from the sub-prime fallout. This is according to research conducted by the Stanford Group, a Washington policy research firm.

Also important to keep in mind is that we are in an election year. Republican senators have significant numbers of constituents who would like to see their senators and representatives address the current crisis that so many communities are facing.

Dodd only needs a party-line vote in order for his bill to leave the Senate Banking Committee. However if only Democrats sign the bill, it may be in serious trouble once it hits the Senate floor for a vote. Sixty votes will be necessary to avoid a potential filibuster. At least nine Republicans will have to vote for the new legislation for the Dodd bill to be safe. Even if the required nine votes do come through from the Republican senators, a presidential veto still looms.