Congress Confused When it Comes to Fixing Mortgage Crunch

Democratic leaders in congress are divided when it comes to how to fix the growing number of foreclosures and the lack of liquidity in the mortgage market. When they met today they basically focused on two main ideas, providing more money to groups that help homeowners renegotiate their loans, and temporarily allowing Fannie Mae and Freddie Mac to increase their loan limits. This would allow these government sponsored agencies to hold loans they normally wouldn’t and would increase liquidity in the market.

House speaker Nancy Pelosi said today that “the subprime crisis demands action, and we are working to protect families who have lost their home or are in danger of foreclosure.”

The government has been having problems recently getting these “actions” approved as the house has already approved several bills aimed to help the mortgage problem but the Senate has been having problems getting these through. One of these ideas that I personally do not think would work would allow bankruptcy judges to change the terms of a mortgage for subprime borrowers. When a loan has been priced by mortgage investors it is priced based on the whole package. If there is a risk assessed that includes the possibility of them losing out because now bankruptcy judges are allowed to change their signed contracts everyone is going to suffer with higher rates. This isn’t a good fix and is only going to cause lenders to take unnecessary losses. Increasing Fannie Mae and Freddie Mac limits would allow some of these borrowers to refinance into fixed rate mortgages and would give a good exit strategy for many borrowers.