In an effort to stave off a push to expand the federal government’s power to help troubled subprime borrowers, the Bush administration unveiled today a more modest plan for the Federal Housing Administration to refinance up to 500,000 at-risk homeowners. Assistant Secretary for Housing Brian Montgomery announced during a House Financial Services Committee hearing that his department would expand its FHA Secure program that has served 150,000 borrowers since it was unveiled in August. Under the current program, borrowers could qualify for FHA refinancing if they had made consistent monthly payments before their adjustable-rate mortgages reset to a higher rate, making them unaffordable. Montgomery said the program’s eligibility would be expanded to borrowers who were late on a few mortgage payments, helping an additional 100,000 home owners. The lender would have to write the loan down to either 97 percent or 90 percent of the home’s new value, depending on the borrower’s level of risk.
The announcement was intended to take the wind out of the sails of a more robust bill by House Financial Services Chairman Barney Frank that would allow FHA to refinance up to $300 billion in new guarantees for subprime loans at risk of default. Under the Frank bill, lenders would first have to write down the mortgages to make them more affordable. In exchange, the lender would be paid from proceeds of the new FHA loan with no additional credit exposure to the borrower. The FHA would provide mortgage insurance on the new loan, which would be sold.
A key difference between the two proposals is money: The administration’s effort would be self-funded through borrower premiums on the new loan rather than the estimated $10 billion to $20 billion cost for Frank’s bill. House Republicans have criticized the Frank bill for its cost and the increased exposure to a taxpayer bailout if the loans go bad. “Any plan that would require American taxpayers to assume the risks incurred by mortgage lenders and borrowers during the run-up in housing prices earlier this decade raises serious questions,” said Financial Services ranking member Spencer Bachus.
Democrats questioned whether the administration’s proposal would be sufficient, noting that more than 2 million borrowers will face higher payments in the coming years when their interest rates reset. “We all have been fiddling while Rome has been burning,” said Housing Subcommittee Chairwoman Maxine Waters, D-Calif. Montgomery said the administration has many concerns with the Frank bill, noting it would permit lax underwriting standards for the refinancing. The administration strongly opposes provisions that would allow lenders to sell troubled loans in the program through an auction process, as well as its language to provide $10 billion in loans and grants to states to buy and rehabilitate vacant, foreclosed homes.
Frank challenged the notion that his bill would put taxpayer funds at risk. “Does this change [on FHA Secure] — which expands the eligibility, waive some of the objections on default — does it expose us to people who are riskier than we have previously taken into the FHA?” Frank asked Montgomery. He said that it did. Frank noted Montgomery’s answer proved that all sides agree that the federal government will assume more risk regardless of the plan that goes into effect. Senate Banking Chairman Christopher Dodd will lead a hearing on the issue Thursday to discuss his proposal on the issue. In the meantime, the Senate has been working its way through remaining amendments before passage of its housing-stimulus package. Majority Leader Reid said this morning there were up to four germane amendments pending to the bill.
This article appears in the April 12, 2008, edition of National Journal Daily PM Update.