By Benton Ives, CQ Staff

Democratic lawmakers gave a cool reception to the Bush administration’s latest plan to help struggling homeowners, saying the initiative does not go far enough to stave off foreclosures.

Under the program the White House announced Tuesday, six of the nation’s largest mortgage servicers, representing about 50 percent of the mortgage market, will contact borrowers who are 90 days past due on payments. After a quick evaluation, some of those borrowers would be given the option to delay the foreclosure process for 30 days, while the lender and homeowner attempt to work out more-affordable loan terms.

Democratic lawmakers criticized the plan, dubbed “Project Lifeline,” saying it offered too little relief for struggling homeowners and came too late. Also, because the plan is voluntary, critics worry that it lacks sufficient teeth to help homeowners.

“The industry and the administration are running to catch up as fast as they can to a problem that is getting broader and deeper by the day, but they seem to be falling further and further behind,” said Democrat Christopher J. Dodd of Connecticut, chairman of the Senate Banking, Housing and Urban Affairs Committee.

Dodd has suggested setting up a government-sponsored company to buy distressed mortgages or mortgage debt and work the mortgages into more-affordable loans. He also has proposed that mortgage finance giants Fannie Mae and Freddie Mac step in to help borrowers.

“Homeowners at risk of foreclosure are floating 50 feet from shore while Project Lifeline throws them a 30-foot rope,” said Senate Majority Whip Richard J. Durbin , D-Ill. “We need a plan that goes further.”

He pointed to a bill (S 2136) that would allow bankruptcy courts to modify terms of home mortgages during bankruptcy proceedings. The Senate Judiciary Committee is set to mark up the measure Thursday.

Borrowers’ advocates say the Durbin-backed measure and a companion House bill (HR 3609) could help hundreds of thousands of struggling borrowers stay in their homes and speed the rate of loan modifications. But the lending industry strongly opposes the legislation, saying it would raise interest rates for all borrowers as lenders priced in the risk that a home loan could be written down in the future.

The House Judiciary Committee approved the House measure Dec. 12.

Latest Administration Plan

Treasury Secretary Henry M. Paulson Jr. said the administration plan “is an important new initiative, targeted to reach not only subprime borrowers, but all 90-day delinquent homeowners nationwide.”

The announcement that banks will broaden their outreach to borrowers follows a “Hope Now” plan launched in December that was intended to help subprime borrowers keep their homes. About 1.8 million subprime borrowers — who took out loans at higher interest rates because of spotty credit histories — are threatened with foreclosure as their adjustable-rate mortgages reset to higher interest rates.

The Hope Now plan would allow loan- servicing companies to freeze interest rate increases for five years on some adjustable-rate subprime mortgages.

Many lawmakers have grown increasingly skeptical of that initiative, saying it has not helped a sufficient number of homeA-owners. Paulson, however, said that in the first three months of the program, mortgage servicers sent 775,000 letters to at-risk homeowners and initially drew a 16 percent response rate.

The industry coalition that developed the plan said last week that it helped some 545,000 subprime borrowers stay in their homes in the second half of last year, as servicers modified their loans or set up repayment plans.

First posted Feb. 12, 2008 1:33 p.m.

Correction
Corrects to say that Sen. Durbin's bill is S 2136.