US takes steps to ease housing crisis

President Bush and Federal Reserve chairman Ben S. Bernanke yesterday took small, but symbolic steps aimed at easing the spreading housing and foreclosure crisis, and calming jittery financial markets.

Bush, at a White House briefing, revealed a plan that would make it easier for an estimated 80,000 homeowners to avoid foreclosure by refinancing out of rising adjustable-rate mortgages into lower cost fixed-rate loans. Bernanke, speaking at an economics conference in Jackson Hole, Wyo., reemphasized the Fed will "act as needed" to prevent recent turmoil in financial and credit markets from damaging the US economy.

Bush's proposals and Bernanke's statements were modest, analysts said, but they reassured financial markets they take seriously the threat posed by a housing and mortgage meltdown. Although Bernanke's speech largely repeated earlier statements of the Fed's readiness to act, investors took it as more evidence it would cut interest rates when policy makers meet Sept. 18.

Such a rate cut, the first in more than four years, would lower borrowing costs for consumers and businesses, and provide a boost to the economy.

"The Fed received a wake-up call that the housing market problems had wider ramifications," said Brian Bethune, US economist at Global Insight in Waltham. "They're not in denial anymore, in terms of the stresses out there, and they're poised to act."

The Dow Jones industrial average jumped 119.01 points to 13,357.74. After a roller coaster week that saw the blue-chip index plunge 280 points Tuesday, and soar nearly 250 points Wednesday, the Dow closed down 21.13 for the week.

The collapse of the US housing market, after years of booming sales and soaring prices, has recently plunged global financial markets into turmoil, raising fears of a credit crisis choking off economic expansion. Rising defaults on risky mortgages, known as subprime, and mounting losses by hedge funds that invested heavily in these mortgages have spooked lenders and investors, leading them to curtail credit and capital available to businesses and consumers.

The Fed and central banks from other nations recently had to pump more than $100 billion into the global banking system to keep financial markets from seizing up.

Analysts, meanwhile, fear the crisis could get worse as an estimated 2 million adjustable-rate mortgages are scheduled to reset higher within the next two years, increasing the likelihood of defaults. Many of these homeowners planned to refinance before their loans reset, but because they have less than stellar credit, they are unable to find lenders or low enough rates to bail them out.

Bush's proposal is aimed at helping a fraction - about 80,000 - of these homeowners. The proposal would allow some borrowers with credit blemishes to obtain federal mortgage insurance, which, like private mortgage insurance, guarantees lenders they'll get paid. This mortgage insurance would make it easier for borrowers to refinance into lower cost fixed-rate mortgages.

In addition, Bush also called for tax changes to help struggling homeowners who sell homes for less than their mortgage loan. Currently, if a lender forgives part of the loan, that is considered income and subject to income taxes. So, a homeowner who sells a home for $20,000 less than the mortgage has to pay income tax on that $20,000.

The administration also said it supported better disclosure requirements to give homeowners complete, accurate, and understandable information about loans; stronger mortgage lending standards to ensure borrowers can afford the loans; and aggressive enforcement of mortgage fraud and predatory lending laws.

"I've made it a top priority to help our homeowners navigate these financial challenges," Bush said at the White House. "The government's got a role to play. But it is limited."

US Representative Barney Frank, Democrat of Newton and chairman of the House Financial Services Committee, called Bush's proposal a "big move." Although the administration needs to go further on some issues, such as making mortgage insurance more affordable, Bush's proposal bridges the philosophical gap between the White House and the Democratic Congress, which favors more direct government action, Frank said.

"This is really a big change for an administration that was saying the free market can do it all," Frank said. "I welcome this, and I'm willing to work with them."

Economists said yesterday that Bush, the Fed, and Congress face a tricky situation as they respond to housing and mortgage problems. If their policies bail out investors, lenders, and homeowners who made risky bets and lost, it could encourage them to do it again, creating bigger problems down the road.

"There was a lot of speculation," said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "Are we bailing out actual homeowners or investors and people who bought second homes and just don't want to pay the mortgage?"

Robert Gavin can be reached at rgavin@globe.com.