Democratic sponsors of a plan to allow the Federal Housing Administration to refinance up to 2 million at-risk subprime borrowers picked up an unexpected ally Thursday as they battle the Bush administration over their proposal: presidential candidate and Sen. John McCain, R-Ariz.
In an economic speech to small-business owners in Brooklyn, N.Y., McCain unveiled a plan to allow the FHA to refinance new loan guarantees for borrowers who face an interest-rate reset on their mortgage that will make them unaffordable.
Under his plan, a loan servicer would first have to write down the mortgage to near its current fair-market value and retire the debt. The borrower then could be eligible for an FHA-insured loan at a 30-year fixed rate. It would apply to only subprime borrowers who took out loans after 2005 and live in the home.
The McCain plan is not as expansive as proposals by Senate Banking Chairman Christopher Dodd or House Financial Services Chairman Barney Frank that aim to help up to 2 million at-risk borrowers and could cost up to $20 billion. But it represents a break from the Bush administration with apparently broader eligibility, applying it to borrowers who are delinquent, in arrears, facing a reset or otherwise show they cannot afford their current loan.
“We will combine the power of government and the private sector to find immediate solutions for deserving American homeowners,” McCain said.
In contrast, the administration announced Wednesday it would expand its FHA Secure program to serve an additional 100,000 homeowners. Such help would apply to borrowers with adjustable-rate mortgages who were late on three consecutive monthly payments within the last year; previously they were required to make their monthly payments until their teaser rates reset. Overall, 500,000 homeowners are expected to receive workouts with the changes.
“He is trying to split the difference between us and the Bush administration. He is not necessarily splitting the uprights here,” grumbled one House Democratic aide.
McCain’s plan does give the Democrats’ plan more momentum, especially after the Senate voted 84-12 Thursday to pass its housing-stimulus package. Though not briefed on details, Dodd said he was pleased McCain was coming around to his way of thinking and noted that other Republicans, such as Sen. Judd Gregg of New Hampshire, have been receptive.
“No one knows where the bottom is in this problem. Until they have some sense of where the bottom is, they’re going to be unwilling to unleash capital,” Dodd said of the need for FHA to enter the marketplace.
Dodd and Frank have picked up confidence in recent weeks that their plans stand a good chance of passage, feeling that both Federal Reserve Chairman Bernanke and Treasury Secretary Paulson will ultimately accept their final agreement.
Frank intends to mark up his bill April 23, according to an aide.
The two Democrats have a slight difference in eligibility standards: Frank would require a borrower to have at least a 40 percent debt-to-income ratio, while Dodd does not.
Ellen Harnick of the Center for Responsible Lending said a 40-percent ratio was too burdensome because servicers already have other criteria to filter out those in need of restructuring, and such a level would leave little remaining income for other household expenses.
This article appears in the April 12, 2008, edition of NJ Daily.