WASHINGTON — Despite an alternative plan offered by the Bush administration to expand the Federal Housing Administration's role in combating the housing crisis, House Republicans appeared wary Wednesday of extending the government's risk any further.
Though Republicans probably prefer the Department of Housing and Urban Development's approach to a broader but similar plan pushed by House Financial Services Committee Chairman Barney Frank, some GOP members said any government expansion would benefit lenders at the expense of taxpayers.
"The losers are homeowners and renters who behaved responsibly yet will now be required to pony up tax dollars to bail out those who did not, if housing prices continue to decline and borrowers prove incapable of making the payments on their FHA-insured mortgages," said Rep. Spencer Bachus, the committee's top Republican, at a hearing on Rep. Frank's bill.
At issue are different iterations of an idea to expand the FHA, a government mortgage insurance program for low- and moderate-income borrowers run by HUD, so that it could backstop loans at risk of foreclosure.
The hearing was meant to test regulators' response to Rep. Frank's plan, which would give servicers the option of writing down underwater mortgages for borrowers who cannot afford them to 85% of their appraised value, then have the FHA insure the loans as an alternative to foreclosure.
But the administration added another option to the mix on Wednesday. Though offering substantial criticism of Rep. Frank's draft bill, FHA Commissioner Brian Montgomery said the administration could address the problem in a more "measured" way using the same general idea, and he unveiled details of its intent to expand the scope of FHA Secure.
So far the refinancing program has benefited only a fraction of borrowers at risk of foreclosure. Mr. Montgomery said that it could reach 500,000 more borrowers this year, on top of the 150,000 it has already helped, and could do so without legislation.
The program would be changed to end a prohibition against defaults so that borrowers with adjustable-rate mortgages who had been delinquent for as much as three months could still qualify. The FHA would also go ahead with a risk-based premium plan it has been trying to carry out that would require borrowers with weaker credit to pay higher rates.
The higher premiums would fund the program, he said. To participate, lenders would write down principal within a loan-to-value range of 90% to 97%.
The FHA would also drop a down payment assistance program that it says has depleted the FHA fund. "This new administrative change will ensure the integrity of the FHA insurance fund over the long term, protect the taxpayer, and guarantee that FHA will be around to help struggling homeowners in the future," Mr. Montgomery said.
This approach won some fans among Republicans. Rep. Judy Biggert, the lead GOP member on the financial institutions subcommittee, praised the administration's plan, saying that it could reach more borrowers without cost to taxpayers. "Given the right options, many of these borrowers can be helped without resorting to an inappropriate taxpayer-funded bailout," she said.
For his part, Rep. Frank noted the similarities between his plan and the administration's, saying they support the notion that principal writedowns backed by the FHA are a viable solution.
"I was pleased to see the Bush administration now agrees with that approach. We have some differences, obviously, … but there does now appear to be agreement that it would be a good thing for the servicers to write down the principal," he said.
He also used the hearing to send a warning to servicers.
Though Rep. Frank's proposal is voluntary, servicers could face significantly tougher regulation down the road if they choose not to participate, he said.
"I want to put the servicers on notice," he said. "We can't make them cooperate, but if we see a widespread refusal on the part of servicers to cooperate voluntarily in what we think is an important economic problem in which we are trying to accommodate their interests and not be coercive, then they can expect much tougher regulation."
