Mortgage Forum

Mike

The House on Wednesday will begin debate on a housing package that would let the government back loans for homeowners at risk of foreclosure which is a move many Republicans have opposed and which the White House has threatened to veto.

The centerpiece of the package is a proposal to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

The bill is sponsored by House Financial Services Chairman Barney Frank, D-Mass.While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers and estimates doing so could cost $2.7 billion over 5 years, of which $1.7 billion would be a cost to taxpayers.

The package is expected to pass the Democrat-led House with some help from Republican congressmen representing states hard hit by the housing crisis.But the bill also includes elements intended to attract the support of Senate Republicans and the White House, both of whom have expressed concerns that Frank's FHA rescue plan could amount to bailing out lenders, borrowers and investors.Nevertheless, late Tuesday, the White House issued a statement threatening to veto the bill in its current form.

The elements in the bill intended to draw Republican support are "modernizing" the FHA for which both the House and Senate have already passed their own bills and more stringent oversight of Fannie Mae and Freddie Mac, the two government sponsored enterprises that guarantee the purchase and sale of home mortgages in the secondary market.

But the administration statement called the inclusion of FHA modernization and GSE reform "largely symbolic" and said Frank's FHA rescue plan "would force FHA and taxpayers to take on excessive risk, and jeopardize FHA's financial solvency."Despite the veto threat, "the House will proceed today. It is too bad President Bush ignored the advice of [Federal Reserve] Chairman Bernanke and decided on right wing ideology over needed compassion and good economics," a spokesman for Frank said.

In a speech about the housing crisis on Monday evening, Bernanke did not explicitly endorse Frank's FHA proposal. But he said that for borrowers who meet certain debt-to-income ratios and own homes worth less than the mortgage debt owed on them, "the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender.

"What the veto threat means for the bill's final prospects is not clear yet."We see this more as an effort to gain leverage over the final shape of the bill and less about an actual veto. The politics of killing this bill are negative for the Republicans, who very much need to win either Ohio or Florida if they hope to keep the White House in November.

Both of those states are suffering severely during the housing mess," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.