FHA Bill Worries GOP Lawmakers

Posted July 9, 2008 at 2:49pm

A bill that would allow the Federal Housing Administration greater responsibility for helping prevent foreclosures nationwide has some Republicans worried that the agency would not be able to handle its new duties.

A bipartisan group of lawmakers has pushed to expand the FHA’s reach during the economic downturn, when the interest rates on millions of adjustable rate mortgages are expected to reset to higher rates. That is likely to result in more expensive mortgages and a much higher risk of default and foreclosure.

The American Housing Rescue and Foreclosure Prevention Act, which is expected to be enacted into law this year, would allow the FHA to guarantee 30-year, fixed-rate mortgages for subprime borrowers facing foreclosure, provided that their lender voluntarily writes down their current loan to current market value.

Sen. Chris Dodd (D-Conn.), chairman of the Banking, Housing and Urban Affairs Committee, has said that it is a natural idea to allow the FHA — which since 1934 has helped to provide stability and liquidity in the housing market — to aid struggling homeowners, broaden homeownership and stimulate the building industry.

Despite its history as an entity designed to stabilize the housing market, some Senate and House Republicans are concerned that the guarantee program would bail out bankers by allowing them to dump their worst loans on the agency. In turn, they fear, the FHA could be distracted or even prevented from carrying out its long-standing mission.

Sen. Kit Bond (R-Mo.) called the approach disastrous and said the program would raise false hope for struggling homeowners.

“It is a fundamental principle that the Congress does not create programs that perpetuate or reward the behavior that led to the housing crisis or damage the key agencies that play a key role in stabilizing the housing market,” Bond said as the Senate debated the measure on the floor this month.

“While I would like to keep as many homeowners in their homes as possible, this strategy is more likely to result in a huge bailout for lenders while protecting a very limited number of homeowners.”

Rep. Jeb Hensarling (R-Texas) raised concerns similar to Bond’s. Hensarling added that in his view, the FHA doesn’t have the resources to manage the additional program.

The FHA, a subsidiary of the Department of Housing and Urban Development, has traditionally been a provider of single-family mortgage insurance for home purchases.

In a rising market this has been a noncontroversial and relatively worry-free line of work, but in June, HUD announced that the agency suffered a $4.6 billion loss last year, one it attributed to high default rates on home loans in the agency’s seller-financed down payment mortgage program, according to Brian Montgomery, HUD’s assistant secretary for housing.

Montgomery has warned that “unless we take action to mitigate these losses, the FHA will soon either have to shut down or rely on appropriations to operate.”

The warnings have caused some to question whether the FHA guarantee program could cause the agency to become insolvent.

House Financial Services Chairman Barney Frank (D-Mass.) has rejected that argument, saying that the only way the program could jeopardize the agency is if none of the 500,000 borrowers expected to be helped by the program repaid their loans.