Obama Administration Open to Ditching Bank Tax as Funding for Refi Plan

WASHINGTON — The Obama administration, which has proposed levying a tax on the largest banks as a way to pay for a broad mortgage refinancing plan, is now in talks with members of Congress about finding an alternative source of funding, Housing and Urban Development Secretary Shaun Donovan said Thursday.

The bank tax was labeled a non-starter on Capitol Hill as soon as President Obama announced the idea in his State of the Union address in January. Three months later, the administration has yet to introduce legislation that would implement the refinancing proposal.

But Donovan said at a Senate Banking Committee hearing Thursday that the administration is working on a bill with members of Congress — he didn't specify which ones — and he is hopeful that legislation will be introduced in the next few weeks.

In an interview after the hearing, Donovan told American Banker: "We're open to working with members on other potential ways to pay for this, and that is one of the issues that's in discussion right now among members."

The HUD secretary also stressed that the Obama administration still believes that a bank tax is an appropriate way to pay for the refinancing plan.

The White House proposal would allow homeowners whose mortgages are not backed by the federal government — and who have fallen outside the scope of previous government refinance initiatives — to take advantage of low interest rates by locking into a government-backed loan.

But the Obama plan looks like a tough sell in the House, where Republicans have dismissed it as an example of election-year politics.

With or without a bank tax, the proposal will be hard to enact largely because it would require the federal government to widen its footprint in the mortgage market at a time when many would like to see that presence shrink.

At Thursday's hearing, Donovan showed a pragmatic streak by also embracing a more limited refinancing bill that Democratic Sens. Robert Menendez and Barbara Boxer are preparing to introduce.

That measure, which was the subject of a separate Senate hearing Wednesday, would only help homeowners who already have mortgages backed by Fannie Mae or Freddie Mac. It would not increase the federal government's credit risk on mortgages.

The bill aims to eliminate barriers that have prevented some of those borrowers from taking advantage of the existing refinancing program for Fannie and Freddie loans, known as the Home Affordable Refinance Program, or Harp.

Responding to questions from Menendez, Donovan said the New Jersey Democrat's legislation is one of most important steps that can be taken to help the housing market in the short term. He said that it will be particularly helpful for homeowners who still have equity in their homes but still face barriers to refinancing.

"So we think it is a critically important bill," Donovan said. "And we look forward to working with you to get it passed as soon as possible."

Under questioning from Republican Sen. Richard Shelby, Donovan downplayed any hope that the Obama administration will take significant steps in 2012 on reforming the nation's housing finance system.

In February, Treasury Secretary Timothy Geithner spoke of plans for more intensive talks with lawmakers to start developing legislation that will wind down and replace Fannie and Freddie. But even then, Geithner stated that he did not expect legislation this year.

Donovan on Thursday threw an even wetter blanket on hope of progress prior to the November elections.

"We do not at this point have a specific timetable nor legislation completed to submit to Congress," he said, though he did add that the administration is happy to discuss the issue with congressional Republicans.

"We are hopeful that there will be bipartisan action as soon as possible on that, but we do not have a specific proposal that we expect to be providing in the next few weeks."