In Washington, Aid To Homeowners Debated

WASHINGTON, Aug. 24 — Faced with a possible tidal wave of home foreclosures beginning this fall, Democrats and Republicans are battling over a philosophical question with huge practical implications: should the government ride to the rescue?

Both the Bush administration and Democratic leaders in Congress agree that legions of homeowners could be overwhelmed in the next 18 months, as low teaser rates expire on more than two million adjustable-rate mortgages, causing monthly payments increase sharply.

More ominously, falling real estate prices and a pullback among mortgage lenders are expected to make it more difficult for overstretched homebuyers to either refinance their way out of trouble or simply sell their houses.

This is really just the beginning, said Karen Weaver, global director for securitization research at Deutsche Bank. Theres a big wave of defaults coming over the next 12 to 18 months.

From a political perspective, the wave would be crashing during the primary and general election campaigns next year.

But the Bush administration and Congressional Democrats are ideologically divided about what Washington should do. Administration officials are reluctant to bail out people who bought homes they could not afford or simply gambled that easy credit and rising real estate prices would lead to quick profits.

Democrats, though opposed to a broad bailout, are proposing an array of measures to help lower-income people renegotiate their loans and stay in their homes.

You cannot simply decree that there will be no foreclosures, Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said. You cant just give people a free ride.

Mr. Frank and other Democrats are pushing for changes that they hope will free more money for lower-income families and shift the balance of power between borrowers and lenders.

The proposals would expand the program of insuring home loans under the Federal Housing Administration, part of the Department of Housing and Urban Development; create a national fund for affordable housing; expand the ability of Fannie Mae and Freddie Mac, the government-sponsored finance companies, to buy renegotiated subprime mortgages; and give bankruptcy judges more power to order easier terms for borrowers.

The Bush administration, with the Treasury Department heading the efforts, is looking for more limited solutions. Administration officials are working on their own ideas to let the F.H.A. insure slightly more expensive homes, which could make it easier for people with low incomes or weak credit to switch out of subprime mortgages and into more traditional fixed-rate loans.

Robert K. Steel, under secretary of the Treasury for domestic finance, has been put in charge of developing other ideas, but administration officials have said little about what those might be.

The president has asked Treasury to be clearly focused on actions that can be taken, things we can do, to help mortgage holders who are in danger of losing their homes, a spokeswoman for the Treasury Department, Jennifer Zuccarelli, said. We are looking at all other options to help stressed borrowers.

For the last six years, administration officials have followed a laissez-faire approach, saying they did not want to restrict innovative mortgage products.

But it may be difficult to continue that hands-off policy much longer. The number of foreclosure filings in July was almost double that of a year ago, according to RealtyTrac, which provides real estate data. About 13 percent of adjustable subprime mortgages are past due, but most of the problems are on loans whose monthly payments have not yet been adjusted upward.

Deutsche Bank estimates that about $400 billion in subprime loans are scheduled for rate increases of 30 percent or more by the end of 2008.

Consequently, many Democratic lawmakers are pushing for measures that would make it easier for imperiled homeowners to replace their adjustable subprime mortgages with more traditional 30-year fixed-rate mortgages.

Democrats also want the administration to let Fannie Mae and Freddie Mac buy a larger volume of mortgages for their own portfolios. The two government-sponsored companies buy billions of dollars in mortgages each year, up to a loan limit of $417,000, and package them into securities that can be traded. They also hold some of the bundles of mortgages in their own portfolios to increase returns to shareholders.

Democrats, including Mr. Frank in the House and Senator Christopher J. Dodd of Connecticut, chairman of the Senate banking committee, contend that Fannie Mae and Freddie Mac could help thousands of people refinance their subprime mortgages if the two finance giants were allowed to hold those loans in their portfolios.

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