WASHINGTON — The Senate Banking Committee approved a bill Wednesday that would reform the Federal Housing Administration, and the bipartisan vote of 20 to 1 signals the legislation is likely to pass the full Senate soon.
But even though the bill was on the fast track to enactment, several analysts and consumer groups said they doubted it would accomplish what President Bush and lawmakers have said is its primary goal: helping to stem a wave of foreclosures in the subprime mortgage market.
"The number of people that get affected by this — most of the estimates I've seen are fairly limited," said Brian Gardner a political analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "There's tremendous political pressure on Washington to be seen as doing something, but actually doing something and solving something are different issues."
The Senate bill, which is narrower than the version the House passed Tuesday, would raise the limit on loans the FHA could insure by 15.2%, to $417,000, and would lower by half, to 1.5%, the minimum down payment required from borrowers.
Officials at the Department of Housing and Urban Development, which oversees the FHA, estimated that the reform legislation would allow them to help an additional 200,000 borrowers. But some consumer group estimates say that more than 2 million people are at risk of losing their homes when the rates on many adjustable-rate mortgages reset in the coming months.
Several analysts said that it also would take time for the FHA to be able to implement reforms, and that the biggest wave of loan resets is expected next month.
"FHA may not be able to scale up quickly," said Mark Zandi, the chief economist and co-founder of Moody's Economy.com Inc. "It takes time to put together the personnel and the infrastructure to originate more loans, to underwrite more loans."
Consumer groups said that even though they are happy about the reform bill, they hope Congress will do more.
"These changes to FHA have some potential to improve the program … but the only way to stop another round of extreme predatory lending is to have legislation that goes to the heart of the problem, which is to have substantive prohibitions on abusive behavior," said Alys Cohen, a lawyer with the National Consumer Law Center.
Some mortgage analysts and industry representatives hailed the bill as a critical first step and said it would help solve some problems in the market.
"The floodgates are going to open for FHA borrowers and lenders," said Howard Glaser, a mortgage industry consultant. "FHA is the only game in town."
James Ballentine, a lobbyist for the American Bankers Association, said FHA reform is overdue and would benefit lenders by giving them more options.
The bill helps "put FHA back on lenders' screen as an alternative to helping out low-income and middle-income borrowers.," he said.
Lawmakers widely praised the bill, saying it would help struggling homeowners refinance and give subprime borrowers access to traditional fixed-rate products.
The bill is "an important step in addressing some of the problems that have arisen in our nation's housing and mortgage markets," said Senate Majority Leader Harry Reid, D-Nev. "These changes should make the FHA program a better option for both new homeowners and those borrowers looking to refinance their mortgage."
But Sen. Richard Shelby of Alabama, the Banking Committee's top Republican, who has blocked attempts to reform the FHA in the past, made it clear during the vote that he still harbors concerns about its expansion.
"It is … worth noting that the program does not insure the success of borrowers. It only insures the risk of loss to lenders," he said. "I am greatly concerned that many FHA borrowers will quickly find themselves with negative equity in the near future."
Senate Banking Committee Chairman Chris Dodd, the Connecticut Democrat who sponsored the bill, told reporters after the hearing that he hopes the Senate can pass FHA reform quickly, but that he still plans to pursue further action to clean up lending practices. "Hopefully it's not only a substantive step, but a confidence-building step," he said.
"There is a lot that needs to be done here, and I'm determined to move forward."
