Ways To Ameliorate Mortgage Mess

The Wall Street Journal writes about the various political fixes for the economy.

The question is, will they make things better or worse? Government regulation often creates more problems than it solves.

HOUSING: Democrats, in and out of Congress, are pushing measures to help struggling homeowners. One central idea would have lenders or investors take a loss by forgiving some of the remaining principal on home loans, after which the federal government would back new mortgages that would be less costly for homeowners.

House Financial Services Chairman Barney Frank, a Massachusetts Democrat, has a version that would insure up to $300 billion in refinanced mortgages, even for some delinquent borrowers. Sen. Christopher Dodd (D., Conn.) is promoting a similar measure in the Senate, which would provide government insurance for up to $400 billion in refinanced loans.

The administration has been cool to the Frank-Dodd approach. It says its response thus far has been adequate — including its focus on avoiding foreclosure by encouraging voluntary deals between borrowers and lenders. At the same time, the administration has scolded Congress for not acting on pending proposals to "modernize" the FHA and to strengthen the agency that oversees Fannie Mae and Freddie Mac. Treasury Department officials, however, have proposed talking to Mr. Frank about his idea.

When Congress returns in April, the Senate plans to take up a broad housing bill sponsored by Democratic leaders, which will likely include tax relief for home builders and increased funding for mortgage counseling. Last month, Senate Republicans blocked such a bill, largely because it would give bankruptcy judges the ability to modify the terms of certain mortgages. It appears unlikely this provision will make it into law. The provision continues to be opposed by many Republicans and the White House.

MORTGAGE MARKET: Last week, the regulator for mortgage giants Fannie Mae and Freddie Mac loosened certain rules for the pair, allowing them to pile more mortgage securities onto their balance sheets. Fannie and Freddie can now purchase an additional $200 billion of mortgages and related securities, equivalent to about 10% of expected U.S. home-mortgage lending this year.

Also, regulators are scheduled to vote today on a proposal to allow the 12 regional Federal Home Loan banks to buy as much as an additional $160 billion in mortgage-backed securities, people familiar with the matter said. Both moves could help revive the mortgage security market.

The U.S. Federal Reserve has made its own moves in this area. Two weeks ago, it unveiled a plan to lend as much as $200 billion of Treasurys to bond dealers for up to 28 days. In return, it would take temporary ownership of their now-shunned mortgage-backed securities.

FINANCIAL REGULATION: Senior Treasury Department officials have spent months drawing up a blueprint for financial-market regulation. The recent financial turmoil has made that effort more urgent. The Treasury plan could propose moving the Fed out of day-to-day supervision of state-chartered banks, people familiar with it said. Instead, the Fed would be given a more sweeping responsibility to monitor financial-market stability.