The House Financial Services Committee began debate today toward approving legislation to allow the Federal Housing Administration to refinance up to $300 billion in new guarantees for subprime loans at risk of default, despite specter of a White House veto threat. Chairman Barney Frank has argued his bill is needed to help provide liquidity to a mortgage market that has been hit with foreclosures and declining home values and to help communities facing a wave of foreclosures. “The problem is that foreclosure causes concentric circles of damage,” Frank said. “Everybody in the neighborhood where there is a foreclosure is victimized because foreclosure property causes problems economically, in terms of property values and even more in the quality of life.” Under the Frank bill, lenders would first have to write down the mortgages to make them more affordable to the borrower. In exchange, the lender would be paid from proceeds of the new FHA-guaranteed loan with no additional credit exposure to the borrower. Acting HUD Secretary Roy Bernardi said in a letter to Frank that the bill is “overly prescriptive” and would “force the agency and taxpayers to take on excessive risk and jeopardize its stability.” He said the bill would apply to borrowers with a higher debt-to-income ratio than FHA currently allows and contains provisions that would limit lender participation, such as a waiver of prepayment penalties.
Lawmakers originally wanted to help borrowers whose adjustable-rate interest loans are about to reset to a higher rate. But such resets are typically tied to the London Interbank Offered Rate, which has been falling in recent weeks. Instead, proponents have emphasized that the bill would help millions of borrowers who own mortgages much more than their homes are currently valued. Rep. Randy Neugebauer, R-Texas, said: “We are saying, well maybe the federal government’s role is when I go get upside down on my house, that the government should turn me right-side up. Where do we stop that process?” Democrats responded that the federal government has to play a role because investors have fled to mortgage market, drying up liquidity, and that the program would be strictly voluntary for the lender and the borrower. The panel will debate the bill today and finish its roll call votes on it April 30. It will be part of a housing-stimulus package that will be on the House floor the week of May 5.
The panel adopted by a voice vote an amendment by Rep. Melissa Bean, D-Ill., to prohibit borrowers from participating if they had misrepresented their income on the loan application. It also adopted another Bean amendment that would allow the FHA to retain a lien on the residence for the life of the new loan, and prohibit the borrower from obtaining a second mortgage for at least five years, unless it is for home improvement. Members also voted to adopt an amendment by Rep. Shelley Moore Capito, R-W.Va., that would increase the limits for home mortgages guarantees covered by the Veterans Affairs Department. The panel defeated a Republican substitute that would improve disclosure for loan documents, provide legal immunity for loan servicers who restructure a mortgage, and provide additional counseling funds.
This article appears in the April 26, 2008, edition of National Journal Daily PM Update.