Shares of homebuilders and related exchange traded funds (ETFs) rose on news of the government’s new plan to stop the significant mortgage foreclosures.

iShares Dow Jones US Home Construction (ITB) jumped up 7% yesterday, while the SPDR S&P Homebuilders (XHB) ended the day 6.7% higher. In midday trading, both of these funds have lost yesterday’s gains, feeling the pain that has spread all over today’s market.

Wanfeng Zhou for Thomson Financial says Barney Frank, the House Financial Services Committee Chairman, proposed legislation that would allow the Federal Housing Administration to insure and guarantee refinanced mortgages that have been significantly written down by mortgage holders and lenders. The foreclosure peak has not yet been hit this cycle. A decline in foreclosures would also stabilize home prices in an already flooded market.

Today, President Bush will unveil his own proposal to overhaul lending, reports Marcy Gordon for the Associated Press. Prospective home buyers would get easier-to-understand information on the terms of their mortgages and save money on closing costs. The secretary of the Department of Housing and Urban Development (HUD) said many of the mortgage problems experienced today are a direct result of the complexity of the lending process.

Naturally, the mortgage broker industry is expected to oppose the plan. After a 60-day public comment period, the proposal could be in effect before summer.

Tags | Homebuilders, Real Estate