Democrats Propose Mortgage Solution

Updated from 2:04 p.m. EDT

Democrats in Congress are piecing together what many are beginning to say is the inevitable government bailout for borrowers and lenders caught up in the housing bust, an effort that goes further than the White House wanted in earlier efforts.

Rep. Barney Frank (D., Mass.) announced a plan Thursday to let the Federal Housing Administration insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders.

The chairman of the House Financial Services Committee wants to refinance one million to two million loans for at-risk borrowers by permitting the FHA to provide up to $300 billion in new guarantees to get borrowers into viable mortgages. In exchange for accepting a writedown of principal, lenders or mortgage holders would receive a payment from the proceeds of a new FHA loan if the borrower "can reasonably be expected to pay" the restructured mortgage.

Frank's plan would also provide $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible.

Only homeowners in owner-occupied principal residences could qualify for the program, in order to prevent speculators and second-home buyers from benefiting from it. Also, to remove any incentive for a borrower to purposely default on an existing mortgage, the plan requires borrowers to have had a mortgage debt-to-income ratio of no less that 40% as of March 1 to qualify.

Frank's proposal came on the same day that Treasury Secretary Hank Paulson announced a series of new regulations developed by the President's Working Group on Financial Markets aimed at restoring faith in securities markets.

Credit markets have been rocked by a colossal blow-up in mortgage-related financial products amid the deepening housing slump, but none of Paulson's remedies can solve the current issues of insolvency that are plaguing investors, borrowers and lenders.

Congress and the Bush administration did pass an economic stimulus bill that offers consumer tax rebates, business tax breaks and other subsidies, as well as raising the limit on the dollar amount of loans government-sponsored mortgage giants Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) can buy. But the White House has focused more on private-market-oriented approaches to solve the housing crisis.

In a recent PBS interview, President Bush -- who once touted record-levels of home ownership in the U.S. as an economic achievement for his administration -- declined to rule out using taxpayer money to aid struggling homeowners.

"I just need to hear what the good plan is -- and without having lasting long-term damage to the economy," Bush said. "I have heard about using taxpayers' monies to buy empty houses, which I think would be a huge mistake. That plan doesn't help homeowners. That plan helps lenders. And we want to help homeowners."

Know What You Own: Fannie Mae has been hit due to the mortgage crisis and some of the other stocks in its field that have also been hit include Citigroup (C Quote), Wells Fargo (WFC Quote), Countrywide Financial (CFC Quote), IndyMac Bancorp (IMB Quote) and Bank of America (BAC Quote). These stocks were recently trading at ($20.87, -1.60%), ($29.30, -0.81%), ($4.72, -0.63%), ($5.36, +6.14%), and ($36.97, -0.16%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.