Fevered talk in the capital of possible government fixes for the mortgage crisis belies an inconvenient truth of the credit market: banks simply are not eager to lend money.
Congress and the government may have a limited capacity to ease the crisis because it has gotten too advanced, experts say.
The latest signpost: Even a relatively modest legislative proposal to tighten the government's reins on mortgage finance companies Fannie Mae and Freddie Mac won't be coming together soon in the Senate Banking Committee, its chairman Sen. Christopher Dodd said Thursday.
Even with the Federal Reserve cutting a key interest rate five times in recent months, banks have been retrenching on lending. Many have suffered billions of dollars in losses from subprime mortgage securities that have sucked their capital dry.
On a retail level, 55 percent of U.S. banks recently reported tightening their lending standards for mortgages to creditworthy borrowers, not those with tarnished credit histories considered high risk.
Distress in the credit markets rippled further Thursday when Alabama's most populous county teetered toward becoming the nation's largest municipal bankruptcy. Two major financial companies said they received default notices from banks nervously looking for loan payments.
"This is just not going to be solved today,' said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C., and a former chief economist of the Senate Banking Committee. "A lot of banks just don't have the money right now" to lend.
One possible source of cash: a trade-off worked into legislation to more tightly regulate Fannie and Freddie. The legislation would not only give a regulator expanded authority over the two, but also make permanent the temporary increases in the limits on the size of mortgages the government-sponsored companies can buy or guarantee.
As the Senate Banking Committee debated Thursday, rumors gripped Wall Street that the government would promise to support Fannie and Freddie if their finances continued to wither. The Treasury Department denied the market-moving rumors, but doomsday scenarios continued to swirl around the markets and Capitol Hill.
Shares of both companies hit 52-week lows. Fannie shares dropped 8.1 percent to $22.30 in midday trading after the rumor was denied while Freddie stock fell 7.2 percent to $20.08.
Congress and the administration already have an economic stimulus package, which includes the temporary mortgage-limit increases for Fannie and Freddie and the Federal Housing Administration, under their belt. But a second "housing stimulus" package unraveled in partisan bickering in the Senate last week.
Several proposals are on the table _ including having the government buy up distressed mortgages and foreclosed properties, and allowing homeowners who owe more than their homes are worth to refinance into government-backed loans.
But banks need more than tabled talk to regain confidence.
"It seems some higher force is going to have to get the meeting of the minds together," said Michael Strauss, managing director and senior economist of Commonfund in Wilton, Conn.
That force could be the Federal Reserve.
Fed Chairman Ben Bernanke this week urged banks and other mortgage lenders to trim the amounts of mortgages for distressed homeowners. Yet he acknowledged that even with some relief efforts already undertaken by the government and the banking industry, mortgage foreclosures and delinquencies are likely to continue to rise for a while yet.
