Bailing out the engine of U.S. economic growth

Bloomberg reports that President George W. Bush will outline a number of recommendations and policy changes today aimed at helping subprime borrowers avoid foreclosure.

Bush will let the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates, according to an administration official, who spoke on condition of anonymity.

Tighter credit and higher borrowing costs threaten the housing market, which has been an engine of U.S. economic growth. Democrats in Congress and the party's presidential candidates have criticized Bush for not taking action to prevent the spread of foreclosures.

"The Federal Reserve's interest-rate reductions alone can't fix the problem,'' Peter Meister, an economist at BHF Bank AG in Frankfurt, said in a telephone interview. He called the Bush plan "positive'' both for "the people concerned and the economy as a whole.''

The change would affect borrowers who are at least 90 days behind in payments and let them stay in their homes, the administration official said. Bush, in a statement in the White House Rose Garden, also will back proposals to provide tax relief for homeowners who refinance.
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Among the plans Bush will announce is a joint initiative of the Treasury and Housing and Urban Development departments to identify people who are at risk of defaulting on their mortgages, the official said.

Bush wants the government to work with lenders, insurers and others to develop more favorable loan products for those borrowers, the administration official said.

See Bill Gross' recent commentary where the FHA proposal was floated a week or so ago and Paul Kasriel's critique of that proposal.