Mortgage Deal Draws Opposition

President Bush’s plan to ease the fallout from the mortgage lending crisis is rankling some key conservatives who argue it amounts to nothing less than government meddling.

“It’s akin to negotiating with someone who has put a gun on the table in front of you,” Derek Hunter, federal affairs manager for Americans for Tax Reform, said, describing the administration’s effort to oversee a coordinated response from the private lending sector to assist distressed homeowners.

“It’s not regulation in the traditional sense; it’s, ‘Here’s what we’d like to see, and if you don’t come to something soon, ... we will come down with the force of government on you and make it happen.’ It’s definite market interference,” he said.

A similar refrain is echoing in conservative corners on Capitol Hill.

Treasury Secretary Henry Paulson is headed up to the Hill on Wednesday morning to brief Republicans in the House about the plan.

In interviews with Politico on Tuesday, most members said their understanding was that the Treasury Department is playing the role of facilitator to build an agreement among lenders, borrowers and debt markets.

“I have a concern any time the government steps into a situation where you have private negotiations between parties,” said Virginia Rep. Eric Cantor, a top-ranking Republican in the House who has not yet been briefed on the details of the plan.

“A lot of conservatives clearly have concerns with government intervention in the free market, and clearly the Paulson plan does that,” said a senior Republican aide.

“Government often will do what is politically expedient at the expense of the free market working out its own problems.”

The White House is not advocating a major bailout for the lending agencies that eased qualifications for borrowers during the housing boom, a practice that experts say contributed significantly to the current crisis.

“We shouldn’t bail out lenders. ... We shouldn’t be using taxpayers’ money and say, ‘OK, you made a lousy loan, therefore we’re going to subsidize you,’” Bush said at a Tuesday news conference.

The president added, however, that he is “concerned” about the number of homeowners who are at risk of losing their property and that aiding them will be the primary thrust of the administration’s plan, which is expected to be unveiled by the end of the week.

Although details remain unclear, the White House is considering freezing adjustable interest rates at their initial, teaser levels and offering additional assistance to homeowners with solid payment records.

Among the key questions that remain unanswered are who will qualify for assistance, how long a rate freeze would last and — most crucial to conservatives — whether participation would be mandatory for all lenders.

Bush’s maneuvering represents an about-face for the administration.

When the crisis emerged in late summer, both the president and Paulson adopted relatively low profiles and offered reassurances that the market would take care of itself.

Since then, the president has come under criticism from Democrats, consumer groups and other administration critics for not doing more sooner to stem the growing housing pain, and Wall Street analysts have predicted the crisis could accelerate next year.

“The administration has been late to recognize the severity of the problem and slow to act,” Sen. Chris Dodd (D-Conn.), who chairs the Senate committee with jurisdiction over home lenders, lashed out after remarks by Paulson on Monday.

Meanwhile, congressional Democrats have rushed to respond, introducing a host of legislative fixes opposed by the mortgage industry.

The proposals are aimed at providing both immediate help to homeowners at risk and changing lending practces to avoid a similar crisis in the future.

Versions of both remedies have gained some traction in Congress, particularly on the House side.

Some lobbyists pressing for the Democrat-backed reforms view the White House moves this week suspiciously, saying the administration could be taking action now to pre-empt Congress and tamp down momentum for legislation.

But the White House solution, thus far, is getting mixed reviews, as well.

Consumer advocates said, at best, the Bush plan would address only a portion of the at-risk borrowers.

“It’s very large, and it’s getting larger,” said Allen Fishbein of the Consumer Federation of America.

Right now, Moody’s estimates that lenders have relaxed terms on just 1 percent of the subprime mortgage loans that reset to higher interest rates since January.

Even if the Bush plan ups that tenfold, a whole lot of borrowers are still in trouble, said Kathleen Day, spokeswoman for the Center for Responsible Lending.

The center’s analysis predicts that more than a million subprime mortgages made during 2005 and 2006 will end in foreclosure.

“We welcome any effort” to help strapped homeowners, she said. “But the devil is in the details.”

Conservatives are also waiting to see the details.

“They’ve done so many things that are contrary to the free market policy,” from farm subsidies to No Child Left Behind to Medicare expansion, said Cato Institute senior fellow Dan Mitchell. “I don’t give them the benefit of the doubt anymore.”

A major concern for free market die-hards is that any intercession in the crisis would lead to what economists call “moral hazard” — in a nutshell, the government would essentially signal to borrowers and lenders that they’re free to be as risky as they want to be, because Uncle Sam will come to the rescue.

Phil Kerpen, director of policy for Americans for Prosperity, said if the plan produces truly voluntary actions by lenders, investors and borrowers, then it’s a fine market solution to the problem.

To the extent players are compelled, it would raise concerns for conservatives, even if the intervention doesn’t involve taxpayer bailout.

Regulatory meddling would be bad, as well.

“There’s a risk here that a precedent could be set that risky behavior will sort of be rewarded by government intervention — that people won’t face the consequences of risk taking,” Kerpen said. “And that could have real consequences in the future.”

The skeptics also warn that messing with the market could translate into distortions and slower growth in the future.

John Berlau, director of the Competitive Enterprise Institute, said the administration’s push to freeze interest rates for a swath of borrowers essentially amounts to negating millions of contracts among borrowers, lenders and investors, which can only do damage to the market.

What’s worse, he said, if the plan doesn’t work, the administration has left the door open wide for Democrats to legislate more burdensome regulation.

“The Paulson plan, I think, is bad politics full of bad policy,” Berlau said.

Hunter, of Americans for Tax Reform, is also concerned that the Bush proposal, while intended to bring relief in the short term, will send the wrong signals to the lending market.

“Just kicking the can down the street isn’t going to solve this problem,” he said. “It’s going to give you a little bit of breathing room, then it’s going to come back worse.”

Some conservative lawmakers are keeping an open mind.

Rep. Patrick McHenry (R-N.C.) said Paulson appears to simply be coordinating a private-sector response that’s in its own best interest.

“It’s in the best interest of the lenders to come up with a compromise,” he sad. “If they don’t do something to lessen the burden on the real estate market, it will cause a housing-driven recession.”

Rep. Tom Feeney (R-Fla.) said he’s “not opposed to any adjustments, as long as they are voluntary. Otherwise, it would be invasive and foolish.”