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Congress Tries To Put Out Housing Fire

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Mortgage rescue plan cold comfort to Fannie, Freddie, homeowners.

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Foreclosures were 50% higher in June than they were a year ago. During this election year, Congress is prepared to throw billions in taxpayer money at the problem.

Nationwide, 252,363 homeowners received at least one foreclosure notice in June. But the total is down about 3% from May.

Congress is working on a mortgage rescue plan that includes $300 billion in new loans intended to provide homeowners with more affordable, fixed-rate mortgages. Arizona, California, Florida, Michigan and Nevada continue to have the highest foreclosure rates in the nation.

The House and Senate have yet to resolve some differences on the bill, including limits on loans the Federal Housing Administration may insure and Fannie Mae (FNM) and Freddie Mac (FRE) may buy and package into tradable securities. The Senate version of the bill sets the loan limit at $635,000; the House version is $730,000. Lawmakers may vote on the bill today.

President Bush has threatened to veto the bill.

Critics say the measure would plump the deficit and could lead to future tax increases. Worse, critics warn, failure would add a crushing burden to the federal debt, now about $9.5 trillion.

Congress created Fannie and Freddie to increase homeownership, and few would argue with that. Along the way, Congress has, in effect, bought campaign support with public money. Or at least that's the way it's worked out.

Fannie and Freddie have been pounded in the market, sending the stock into the teens from the $60s last October. Investors fear bigger losses are ahead as housing prices continue to swoon and defaults show no sign of slowing.

But analysts at Bear Stearns say Armageddon isn't around the corner.

"Despite the prospect of rising credit costs and more negative first-quarter fair-value marks, we believe Fannie Mae and Freddie Mac have more than enough capital and cash to meet their financial obligations. And new business should be more profitable given tighter underwriting and higher fees," Bear Stearns analysts said in a research note.

Bear Stearns was bailed out by Uncle Sam and JP Morgan Chase (JPM), which bought the investment for $10 a share house last spring.

Many first-time buyers don't take the time to learn the basics of homeownership and quickly get into trouble. The key: Don't over-estimate what you can afford and don't rely on a real estate agent who has a vested interest in getting you into a house larger than your means. If you get a variable rate loan, be sure you understand when the rate resets and how much your monthly payment could increase.
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