Senate Banking Committee members today wrangled over the extent of federal intervention into rescuing homeowners at risk of foreclosure, as Democrats advocated legislation to allow the Federal Housing Administration to refinance up to $400 billion in troubled mortgages while Republicans called for more limited actions that could be done administratively. Senate Banking Chairman Christopher Dodd again made a pitch for his bill during a hearing. Dodd’s measure would allow the FHA to offer new loan guarantees for borrowers who face an interest-rate reset on their mortgage that will make them unaffordable, or who owe much more than their house is worth.
Dodd argued that the measure would have limited liability to the federal government because FHA would insure only up to 90 percent of a home’s value, in contrast to the current FHA limit of 97 percent. Under his bill, another 3 percent of the loan would be held in an insurance pool to cover losses, and the federal government would share in the profit of any sale of the property. “Under my proposal, no one — I repeat — no one, gets what could be described as a bailout,” Dodd said.
Republicans have been hesitant to embrace the Dodd bill even as 1.5 million loans are scheduled to reset in the next two years, many of which will become unaffordable to borrowers. Senate Banking ranking member Richard Shelby said he wanted to ensure any modification would be limited, expressing concern that borrowers that had no down payment, received cash from a refinancing, had poor credit scores or took on exotic mortgage products could be unfairly awarded for taking such risks. “If these same families were not ready for home ownership in a booming market, it is not clear to me how they become ready in a declining market,” Shelby said. Sen. Bob Corker, R-Tenn., said he wondered if such expansion could be carried out through FHA and not legislatively, noting that all parties have the same goal of helping as many troubled borrowers as possible.
The Bush administration last week announced it would expand its FHA Secure program by increasing the program’s eligibility to borrowers who were late on a few mortgage payments, serving as many as 500,000 homeowners. Corker asked Assistant Secretary for Housing Brian Montgomery which legislative changes FHA would need to help additional homeowners. Montgomery replied that FHA would like the ability to charge more than 2.25 percent on the balance of the loan for those based on a higher credit risk. But Dodd said that his legislative fix would help the more homeowners and that it does things that FHA cannot do on its own: allow FHA to charge higher premiums; provide legal immunity for loan servicers that modify a mortgage; and create a board of various regulators to write rules to implement the plan, such as creating an auction process to handle loans on wholesale basis. “You heard the FHA say they can’t [on their own do this]. You got some problems with premiums and other legislative changes and fixes,” Dodd said. Dodd added that he wants to mark up the bill soon, possibly together with legislation to curb predatory lending practices and revamp oversight at government-sponsored enterprises Fannie Mae and Freddie Mac.
This article appears in the April 19, 2008, edition of National Journal Daily PM Update.