Solving the Housing Crisis: Key Legislator Embraces CAP Plan

January 23, 2008

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The chairman of the Senate Banking Committee, Sen. Christopher Dodd (D-CT) today alerted his fellow lawmakers that he would soon be introducing legislation to help distressed homeowners through the creation of a new federal housing corporation modeled after the Center’s proposed Family Foreclosure Rescue Corp.

The Center for American Progress would like to applaud the leadership of Sen. Dodd as well as Rep. Joe Baca (D-CA), who late last year introduced legislation to help qualified homeowners with negative equity in their homes survive the wave of foreclosures sweeping the nation. Rep. Baca’s proposal was also inspired by our report, “Throwing Homeowners a Lifeline: A Proposal for Direct Lending to Qualified Troubled Borrowers.”

Sen. Dodd’s proposed Federal Homeownership Preservation Corporation, which he hopes to capitalize at $10 billion to $20 billion, would buy distressed mortgages at their current value—-a significant discount from the face value--paying for the mortgages with long-term government bonds, bringing stability to the U.S. housing market and global credit markets. The new public corporation would leverage existing entities like the Federal Housing Administration and the government sponsored enterprises to reissue new, 30-year fixed rate mortgages to homeowners at the property’s current value, preventing foreclosure by providing borrowers with a manageable payment.

The plan would also help stabilize neighborhoods and the housing market more broadly by short-circuiting the vicious cycle of foreclosures that lead to lost home equity, which leads, in turn, to increased foreclosure rates. The plan is crafted so that the newly created corporation will cease operating when the crisis abates and is self-funding after initial government capitalization.

"The difference between the old mortgage and the new mortgage would be sufficient, after initial capitalization, to fund the program and cover possible losses," the Connecticut Democrat said in the letter to Senate Majority Leader Harry Reid (D-NV). Sen. Dodd emphasized that this new agency is only one part of a number of steps that need to be taken to stabilize home values in neighborhoods across the country.

To read more about the Center’s homeownership and neighborhood stabilization plans, please see our report, Throwing Homeowners a Lifeline: A Proposal for Direct Lending to Qualified Troubled Borrowers and the housing component of our stimulus plan.