A plan to allow the Federal Housing Administration to help refinance up to 2 million troubled mortgages is headed for a vote in the House of Representatives, after receiving limited bipartisan support in a committee vote Thursday.
Legislation that would enact Rep. Barney Frank’s $300 billion FHA expansion plan was approved by the House Financial Services Committee in a 46-21 vote, with the full House expected to weigh in next week. Although the bill is opposed by the Bush administration, 10 Republicans on the committee joined Democrats in supporting the plan, originally put forward in March by Frank, D-Mass.
While some critics have derided Frank’s plan as a bailout, backers say lenders would have to agree to substantial principal write-downs to participate in the program. Participating lenders would be paid no more than 85 percent of a property’s current appraised value when a mortgage is refinanced into an FHA-backed loan.
Only owner-occupied homes with mortgages originated on or before Dec. 31, 2007, would be eligible. To prevent borrowers from profiting if housing prices rebound, the government would retain a share of future home-price appreciation, with borrowers paying an exit fee when they sell or refinance.
While most of the program’s costs are expected to be covered by mortgage insurance premiums paid by borrowers, backers concede that the government could face losses of up to 2 percent, or $6 billion.
As approved by the committee HR 5830, The FHA Housing Stabilization and Homeownership Retention Act, would also authorize $210 million dollars for foreclosure counseling, and $31.25 million to hire more FBI agents and Department of Justice prosecutors to crack down on mortgage fraud.
Sen. Chris Dodd, D-Conn., has proposed a similar expansion of FHA loan guarantee programs, but Senate Republicans kept Dodd’s proposal out of a foreclosure relief bill passed last month. The bill, the Foreclosure Prevention Act of 2008, would increase FHA loan limits and provide billions in tax cuts for home builders, banks and other businesses that have suffered losses as a result of the housing downturn and credit crunch (see story).
The Bush administration has been critical of proposals by Democrats to expand FHA loan guarantee programs, saying Congress must first pass legislation that would overhaul and modernize FHA’s practices and procedures. Although the House and Senate have both passed FHA modernization bills, differences between them have yet to be reconciled.
Acting Housing Secretary Roy Bernardi last week told lawmakers last week that FHA needs the ability to implement risk-based pricing for mortgage insurance premiums, and that an FHA modernization bill must include a ban on seller-funded down-payment assistance (see story).
The Bush administration is already counting on FHA loan guarantee programs to help troubled borrowers, although critics say many borrowers aren’t eligible for the FHASecure program, created last year to help delinquent borrowers and homeowners with adjustable-rate mortgages refinance into more affordable loans.
On April 9, the Bush administration announced expanded guidelines allowing FHA to insure refinancings for borrowers who have missed loan payments. HUD estimates that the expanded guidelines will allow a total of 500,000 homeowners to take advantage of the FHASecure program by the end of the year.
FDIC’s "complementary" plan
In another recent development, the Federal Deposit Insurance Corp. proposes that Congress authorize a $50 billion public debt offering to allow the Treasury Department to make loans to troubled borrowers that would pay down up to 20 percent of their loan principal.
The FDIC estimates that the Treasury Department could fund 1 million loan modifications at no cost to the government — without creating a bureaucracy to process applications, decide priorities for participation, and monitor compliance.
While plans to expand eligibility for FHA loan guarantee programs are "laudable and will help some borrowers" they also have "generally acknowledged limitations," FDIC Chairwoman Sheila Bair said in a recent editorial published in the Financial Times.
Bair said the FDIC’s proposed Home Ownership Preservation loan program could "complement" efforts to expand FHA programs to help troubled borrowers.
The FDIC envisions targeting the HOP program at loans that were "unsustainable at origination" — a goal that could be achieved by limiting eligibility to loans with debt-to-income ratios exceeding 40 percent when they were made. The FDIC also proposes limiting the program to mortgages within the FHA conforming loan limit and originated between Jan.1, 2003 and June 30, 2007.
HOP loans would pay down a troubled borrower’s existing loan by up to 20 percent, allowing it to be restructured into a fully amortized, fixed-rate loan with interest rate capped at Freddie Mac’s 30-year fixed rate. Borrowers would have to repay their restructured mortgage and the HOP loan, although the mortgage lender would pay the first five years of interest due the Treasury on the HOP loan. After five years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
According to the FDIC, the program would not cost taxpayers because the Treasury would have a "super-priority interest" superior to mortgage investors’ interest guaranteeing repayment. If a borrower defaulted, refinanced or sold the property, Treasury would be first in line to recover the amount of the HOP loan.
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