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Paul Kiesel
Paul Kiesel
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Democrats Calling for Foreclosure Freeze

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The Associated Press reports that four Democratic senators, Serrod Brown (D-OH), Bob Casey (D-PA), Bob Menedez (D-NJ), and Charles Schumer (D-NY), are urging Fannie Mae and Freddie Mac to freeze foreclosures for 90 days on loans they hold.

The lawmakers wrote to the new CEOs and federal regulator (James Lockhart) — now running Freddie and Fannie — that the struggling mortgage giants, which were seized by the federal government on Sunday, should help current troubled borrowers switch to more affordable loans, in order to keep them in their homes.

“Take whatever actions are necessary,” the letter states, so more families, “do not have to suffer the economic and personal disaster of foreclosure.”

The foreclosure freeze would not apply to all loans, but even if the freeze only apply to 25% of the loans Fannie and Freddie hold, that’s still a significant numbers, as the two companies hold or guarantee more than $5 trillion in outstanding mortgages (or more than half of the nation’s total).

The Bush administration seized control of the companies in hope of reversing the prolonged housing and credit crisis, even though most economists suggest that we’re not even quite halfway through it (many predict 2010 as the year the markets rebound — after the option ARM resets that will take place early next year, subsequently resulting in hundreds of billions more in losses).

Fannie CEO Daniel Mudd and Freddie CEO Richard Syron (the latter admittedly ignored the foreclosure crisis) were replaced with Herb Allison, a former vice chairman of Merrill Lynch, and David Moffett, a former vice chairman of U.S. Bancorp, respectively.

James Lockhart, the director of the Federal Housing Finance Agency, needs to ensure that Fannie and Freddie use their clout in the mortgage market to help homeowners caught in the housing crisis, and the letter from the four Democratic senators is the latest sign of mounting congressional pressure.

Representative Barney Frank (D-MA), chairman of the House Financial Services Committee, has made it clear that Fannie and Freddie need to do more to help homeowners now and to not sit on their hands and let this situation get worse.

Democrats have called for Lockhart to follow the example of the FDIC head, Sheila Bair, who has urged banks to modify loans that homeowners can no longer afford. After IndyMac failed, the FDIC temporarily froze foreclosures after taking it over, and later engineered a plan to allow most IndyMac borrowers who were seriously delinquent or in default on their mortgages to switch to loans capped at an interest rate of 6.5 percent.

Democrats and Republicans are also pushing Lockhart to slash the $24 million in compensation that Mudd and Syron stand to gain as they leave their posts. Frank’s committee will examine how the foreclosure prevention law enacted in July is working, next week (not very good, if this is how the crisis has escalated in the last eight weeks). Hearings on the government’s takeover of Fannie and Freddie will also be held soon by Frank and Chris Dodd (D-CT), chairman of the Senate Banking Committee.

Ultimately, if Lockhart is able to get the Bush administration’s approval to suspend foreclosures, it will help put the breaks on a continuing declining housing market, homeowners (who meet applicable criteria) get into new and more affordable loans, and will allow borrowers that were victims of TILA fraud to take legal action, in order to seek an appropriate remedy.