WASHINGTON -- Under pressure from voters to address the nation's housing crisis, Senate Republicans agreed Tuesday to work with Democrats on a compromise plan to stimulate sagging home sales and help distressed homeowners avoid foreclosure.
The agreement calls for Senate Banking, Housing and Urban Affairs Committee Chairman Christopher Dodd, D-Conn., and the committee's ranking Republican, Sen. Richard Shelby of Alabama, to lay out a bipartisan substitute today for a Democratic housing bill that is opposed by the Bush administration and was blocked in February by Senate Republicans.
Although the two sides had not agreed on the specifics of a compromise Tuesday, both offered proposals that would strengthen truth-in-lending laws for the mortgage industry, provide counseling to homeowners facing foreclosure and help some borrowers refinance their homes.
The Senate had been scheduled to vote again Tuesday on the existing Democratic bill, and Republican leaders were prepared to block it again. But senators returned from a two-week break marked by the government rescue of a major Wall Street investment bank and growing anxiety over the economy among their constituents, and some Republicans argued that it was time to start working together.
Sen. John Ensign, R-Nev., said senators plainly could see the scope of economic problems when they were home, and heard about it loud and clear from constituents.
The mortgage crisis has deepened into a credit crisis that threatens a broad swath of the nation, not just families facing foreclosure, he said.
"Consumer confidence continues to plummet," Ensign said in a meeting with reporters. "People are waking up to the fact that this could turn into a severe economic crisis if we don't act along with the Fed."
Because financial markets today are international in scope, "the bottom line is we are in a situation in this country where the entire world's economy can spiral down fairly severely if we don't put a stop to it," Ensign said.
"Unless every member of the Senate was in a cave over the two-week recess, it's pretty obvious that gas prices and housing crisis are the two most important issues to the American public," said Sen. Johnny Isakson, R-Ga., a former real estate broker who was among those urging Republican leaders to stop blocking the legislation. "You can play that game when it doesn't matter. But people's lives, their fortunes, their largest single asset is at stake."
"We don't want to sit on the sidelines," said Sen. John Cornyn, R-Texas. The $30 billion rescue of investment bank Bear Stearns by the Federal Reserve Board in mid-March "got everybody's attention," he said.
Democratic leaders welcomed the agreement, saying it demonstrates the urgency of the economic difficulties that are forcing nearly 8,000 homeowners into foreclosure every day. And the Senate voted to ratify the deal, voting 94 to 1 to permit a debate on housing legislation. Sen. Jim Bunning, R-Ky., was the lone "no" vote.
"I am confident and very, very hopeful that this is going to be a breakthrough," Majority Leader Harry Reid, D-Nev., whose state has been among the hardest hit, said immediately after the vote. "The time has come for us to legislate, not continue our bickering."
"This is a crisis that we have," Reid said. "The only way it is going to be solved is working together."
It was unclear Tuesday exactly what shape the compromise would take. Democrats are pressing to include the most contentious provision of their bill, to give bankruptcy judges the power to cut interest rates on troubled subprime mortgage loans written in recent years.
Under current law, bankruptcy judges are prohibited from modifying mortgages on a person's principal residence. President Bush and other Republicans say rewriting the bankruptcy code would prompt lenders to tighten their standards and raise interest rates. Several Republicans said they would continue to oppose the bill unless the bankruptcy provision is removed.
Democrats also hope to keep a proposal to provide $4 billion to communities to buy and redevelop properties in foreclosure. They say the money is needed to prop up neighborhoods hit hard by the housing crisis and prevent home values from spiraling further downward. The White House also opposes that provision, arguing that it would be too expensive and would bail out lenders and speculators but offer little help to struggling homeowners.
There are many areas of agreement between the two parties. Both want to provide up to $10 billion to finance tax-exempt bonds that could be used to refinance distressed subprime mortgages. Both sides want up to $200 million in additional spending for housing counselors to help troubled borrowers at risk of foreclosure.
Democrats and Republicans both want to strengthen truth-in-lending laws to make sure that future borrowers considering adjustable-rate mortgages are told the highest monthly payments required under their loans. And both sides agree that businesses struggling because of the housing downturn, including home builders, deserve tax breaks.
In addition, Sen. Charles Schumer, D-N.Y., said Democrats are eager to take a look at a proposal drafted by Isakson to offer families who purchase certain homes a $15,000 tax credit. The measure would apply to buyers who act during the next year to purchase a newly built home, a house in foreclosure or a house whose owner has defaulted on a mortgage.
Ensign said he was supportive of the proposal.
A new owner would need to live in the home for three years to qualify for the tax break. Ensign said in that way it would not reward speculators, including people who bought multiple homes in Las Vegas seeking profit during the go-go housing economy.
"I don't think you should be bailed out because you bought three houses," Ensign said. "I cannot tell you how many people in Las Vegas or from other states bought into Las Vegas, bought three or four homes."
Isakson said Congress adopted a similar temporary tax credit in 1975, which worked well to motivate homebuyers. The proposal would cost $14.5 billion over the next five years.
Meanwhile, Dodd has said he hopes to include a more ambitious plan to permit the Federal Housing Administration to guarantee up to $300 billion in risky mortgages as an inducement to persuade bankers to forgive some of the debt. Under that proposal, lenders would be encouraged to work with borrowers who, because of falling home values, owe more on their mortgages than their homes are worth.
FHA insurance would be available on refinanced mortgages if borrowers could afford the new payments and each loan amount did not exceed 85 percent of the home's current value. Lenders would be required to accept the new loan as full payment on the old mortgage and to forgive any fees and penalties.
That idea, also promoted by House Financial Services Committee Chairman Barney Frank, D-Mass., is gaining support among Republicans. The Bush administration is working on a plan to achieve some of the same goals through administrative changes; Tuesday, several Republican senators said they are willing to consider the idea.
"As the economy gets worse," Schumer said, "even some of the Republicans are realizing that they can't be Hoover-like and just say, 'Do nothing.' "
Stephens Washington Bureau Chief Steve Tetreault and writer Tony Batt contributed to this report.