As the mortgage finance crisis expands, government officials are urging lenders to provide flexibility and relief to homeowners. The central bank is also supplying more money to banks to offset the impact of bad loan portfolios.

The Federal Reserve has issued special guidelines encouraging mortgage companies to work with homeowners who risk losing their homes to foreclosure. Many borrowers, for example, would like to refinance into more manageable loans. The government is strongly urging the companies that service those loans to be flexible, and try to make it happen. Nobody wants foreclosures. They're asking lenders to re-negotiate terms, so that they're beneficial to homeowners, and to show leniency toward holders of subprime loans. Many of those loans have variable rates, and approximately 14 percent of subprimes are expected to reset-or adjust to higher payment schedules-within the next two years.

Proposals from the President

President Bush announced that his administration was putting forward proposals aimed at preventing those predicted defaults. The Commander-in-Chief said that he would ask Congress to temporarily suspend the tax liability imposed on borrowers whose lenders forgive part of their mortgage debt. "I believe we need to change that code," the President explained, "so people won't be penalized when they refinance their homes."

Other ideas that the government is hoping mortgage lenders will consider include modification of the terms of existing loans, and deferring payments until homeowners get back on their feet. Administration officials quoted in the press say that the government will also encourage Fannie Mae and Freddie Mac to help low-income borrowers refinance or renegotiate their loans. President Bush also discussed putting together a coalition of community and government agencies to help counsel homeowners who want to refinance, while also providing necessary credit to them.

The loss of credit

Much of the problem stems from the fact that credit evaporates as this current mortgage crisis grows. Those who supply cash for loans stop investing their money in mortgages, at a time when many desperate homeowners need a new loan more than ever. The first indication of this deepening crisis came when lenders tightened their standards for a whole range of different loans, including everything from second mortgages to credit cards. The move left many who wanted to do a strategic mortgage refinance plain out of luck.

With the recent stricter standards, higher interest rates, and more challenging loan applications, many who need to refinance no longer qualify. And the markets for subprime and jumbo loans have essentially dried up, leaving a huge demographic of borrowers with no place to go for a refinanced mortgage. Eventually, lenders will find themselves needing to borrow just to stay in business, so they're turning to the Federal Reserve for more cash at cheaper rates. Recently, the central bank has loosened the supply of money by lowering its discount rate-the rate charged to banks for money borrowed from the Fed. Now the attention has turned to helping out the average American homeowner who is the end-user of those funds.