On August 31, President George Bush laid out a set of proposals to address the rise in mortgage defaults. Bush’s comments came the same day that Federal Reserve Chairman Ben Bernanke pledged to do everything necessary to protect the economy from the housing market turmoil. Bernanke’s comments to a Fed conference in Wyoming were seen as a strong signal that the central bank was moving closer to cutting a key interest rate, possibly as soon as its next meeting September 18, according to sources.

Both Bernanke and Bush emphasized that their actions were not aimed at bailing out investors who had made bad decisions, but rather “homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government,” according to Bush.

Bush’s proposals would make it easier for an estimated 60,000 delinquent borrowers holding adjustable rate mortgages that are resetting to higher monthly payments to refinance those loans using the resources of the Federal Housing Administration’s proposed Secure Program. Bush’s proposal, which FHA officials said would take effect January 1, 2008, marks a significant change because FHA does not now insure refinanced loans from borrowers who are currently delinquent.

“This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes,” Bush said.

The Secure Program would require a new property appraisal and approval from the current holder of the mortgage. Property values have dropped as the housing slump worsened. Experts warned that if the value of a home has declined significantly, major lenders may be reluctant to sign off on a new loan because they would take the financial hit of the difference in value between the new and old loans. However, there is some incentive to assess whether it would be better to take that hit than have a loan that forecloses.

FHA officials said another 20,000 people would be helped by a new type of risk-based pricing for its loan guarantees that will allow lower income mortgage holders to qualify by paying slightly higher rates. This change, which will require the FHA to change its rules, is expected to take effect early next year after a public comment period.

The 80,000 additional people who would qualify for FHA loan guarantees under the proposed changes Bush announced would still be a tiny portion of an estimated 2 million homeowners whose adjustable rate mortgages are scheduled to reset at higher rates by the end of 2008.

As another part of his mortgage package, Bush said he would support legislation currently pending in Congress that would temporarily change tax law to let homeowners avoid paying taxes on forgiven debt in loans being restructured by financial institutions. Under current law, if a house worth less than its purchase price is lost in foreclosure and the bank cancels any outstanding mortgage debt, the IRS can count the forgiven debt as income. In such a case, cancellation of $20,000 in mortgage debt would cost the former homeowner $3,000 in taxes, according to Sen. Debbie Stabenow, D-Mich., who introduced the Mortgage Cancellation Relief Act (S. 1394) in May to prevent IRS from taxing such debt forgiveness. Reps. Robert Andrews, D-N.J., and Ron Lewis, R-Ky., introduced similar legislation (H.R. 1876) in April.

Bush’s proposals follow a number of measures already introduced in Congress to deal with the mortgage lending crisis. Many Democrats said the administration needs to go further by supporting their proposals to lift the current cap on how many home loans mortgage giants Fannie Mae and Freddie Mac can hold in their portfolios and by lifting the current cap on so-called jumbo loans that Fannie and Freddie would be able to purchase.

Sen. Robert Menendez, D-N.J., a member of the Senate Banking, Housing, and Urban Affairs Committee, said, “The president’s proposal is a first step, but this situation is much too serious to leave to the whims and jawboning of this administration,” said Menendez. “We must increase FHA loan limits and make additional mortgage options available to those facing foreclosure.  At the same time, federal regulators also have a responsibility to use their existing authority to protect consumers.  Clearly, current protections aren’t enough; predatory lending should be a federal crime that’s fully enforced.  I will work in coming weeks to develop legislation that fully protects consumers, provides them the information they need to make informed decisions, and ensures that unscrupulous lenders can't take