The Bush administration has come out against a proposal by House Democrats for a massive expansion of FHA loan guarantee programs that’s aimed at helping refinance up to 2 million loans in cases where lenders agree to principal write-downs.
"An attempt to shift costs to taxpayers would constitute a bailout," Acting Housing Secretary Roy A. Bernardi said in a letter to lawmakers Thursday addressing legislation introduced by Rep. Barney Frank, D-Mass.
Frank estimates the program could incur losses of up to 2 percent, or $6 billion, but argues that it would not constitute a bailout because lenders would be allowed to recover no more than 85 percent of a property’s current value as payment for existing loans.
The proposed bill, HR 5830, the FHA Housing and Homeowner Retention Act, would also protect against borrowers flipping refinanced properties at a profit by giving FHA a share of future home-price appreciation.
The House Financial Services Committee this week held markup sessions for HR 5830 and a companion bill, HR 5818, the Neighborhood Stabilization Act, which would establish a $15 billion, HUD-administered grant program for purchasing and rehabilitating foreclosed homes.
The Mortgage Bankers Association says HR 5830 could be improved by giving lenders more flexibility in how much principal they must write down to participate in the program; and by giving investors who agree to write-downs the ability to share in future home-price appreciation.
Bernardi called HR 5830 bill "an overly prescriptive attempt to legislate FHA’s underwriting standards" that would force the agency to take on "excessive risk" and "jeopardize its stability."
By design, the plan would "significantly limit lender participation," Bernardi said. Reliance on a new oversight board would add another layer of bureaucracy, delaying the delivery of benefits claimed by supporters, he added.
Bernardi said HUD wants Congress to complete work on an FHA modernization bill before undertaking any further expansion of FHA along the lines of HR 5830.
An FHA modernization bill must give the agency the ability to implement risk-based pricing for mortgage insurance premiums, Bernardi said, and include a ban on seller-funded down-payment assistance.
"The administration proposed FHA modernization more than two years ago," Bernardi complained in his letter. "Both the House and Senate have passed similar versions of the bill, yet neither chamber has appointed conferees, let alone sent a final version to the president’s desk."
Frank has said he may roll HR 5830 into an all-encompassing housing bill that would include FHA modernization, as well as an overhaul of regulatory oversight of Fannie Mae and Freddie Mac that’s been stalled in Congress for several years.
On April 9, the Bush administration announced its own plan to expand FHASecure, a loan guarantee program it created last year to help troubled borrowers refinance into more affordable loans.
The expanded guidelines, which allow FHA to insure loan refinancings even when borrowers have missed a few payments, would allow a total of 500,000 homeowners to take advantage of the FHASecure program by the end of the year, HUD estimates.
To meet the expanded eligibility requirements, lenders may have to voluntarily write-down mortgage principal balances to 90 percent of loan-to-value ratios for borrowers with adjustable-rate mortgages who have missed three payments.
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