WASHINGTON — Democratic banking committee leaders, the Bush administration, all three presidential candidates, and most of the federal banking agencies embraced the concept last week of expanding the government's role in combating the credit crisis.
The heart of each plan is to allow a struggling subprime borrower to refinance into cheaper loans guaranteed by the government through the Federal Housing Administration, after lenders take a haircut.
Though the plans are substantially similar, policymakers began bickering over the details. In an effort to sort out the differences, and preview next steps, we offer the following frequently asked questions.
How are the plans different?
The largest difference is between the Bush administration's plan and those of lawmakers. For starters, the plan to expand FHA Secure would not require legislation, and is expected to begin implementation within two weeks.
But it also is the narrowest plan. The goal is to reach roughly 100,000 borrowers, compared with 1.5 million under a plan outlined by House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd.
Like the lawmakers' plans, the Bush plan would allow the FHA to insure delinquent borrowers whose mortgages are worth more than the home.
Unlike the Frank-Dodd plan, however, the administration proposal would fund the operational costs through risk-based premiums on the borrower. The lawmakers' plan would require an up-front government cost between $10 billion and $20 billion and charge lenders an additional fee to help lower costs.
Other differences?
There are far too many details to catalog here, but another notable one is the proposed writedown, where even Rep. Frank and Sen. Dodd have daylight between each other. The Bush plan requires the smallest writedown by the lenders, to 90% or 97% of appraised value, depending on how long the loan has been delinquent. Sen. Dodd's plan would require that writedown to be 87% of appraised value, while Rep. Frank's draft bill would require an 85% writedown.
Where does Sen. John McCain's proposal fit into this?
Smack in the middle. Sen. McCain's plan is less ambitious than the Frank-Dodd plan but still broader than the Bush proposal. It, too, would require legislative action, but would require lenders to take a 90% writedown, among other differences. Sen. McCain's campaign estimates it would help 200,000 to 400,000 borrowers. The campaign has estimated it would cost $3 billion to $10 billion to implement.
Do the details matter?
Yes. Even a slight difference between how much a lender must write down, for example, could make a difference in whether a lender participates or opts for a foreclosure. If not enough lenders and servicers participate, the plans' effectiveness will be greatly reduced.
Is legislation necessary?
There are serious questions about whether an expanded FHA Secure plan will help enough people. Charging borrowers who presumably are having trouble making mortgage payments more in risk-based fees may leave many troubled homeowners out in the cold.
Legislation, on the other hand, can appropriate government money to bear much of the cost itself, which is either a good or bad thing, depending on your point of view. Legislation is also necessary to set up a special risk insurance fund, as Democrats have proposed.
What are potential problems?
The FHA proposals are all based on assumptions of how much further housing prices will fall and how attractive the writedown option will become to servicers and investors as an alternative to foreclosure. It also assumes establishing another housing solution will foster more confidence in the market and re-engage skittish investors.
Industry representatives have questioned whether the size of the haircuts Democrats are proposing will seem attractive enough to entice refinancings on the grand scale they desire.
Policymakers are also wrestling with other details, including how to treat second liens. Under the various plans, any second liens would be extinguished, so second-lien holders have little incentive to agree to a plan unless somehow compensated.
Also, determining the appraised value of a home is difficult in the best of times, and particularly so in a market this unstable.
Is this a bailout?
That's an open and likely circular debate. No regulator or lawmaker will acknowledge their plan is a bailout, which is typically defined as a government infusion of cash or the government somehow taking on significant risk. In anyone's plan, however, the government is going to be on the hook for more — potentially still troubled — loans.
As for how much money will ultimately be spent, that depends on the plan. The Bush administration argues its costs will be borne by borrowers through fees; the Frank-Dodd plan says it will only give FHA loans to creditworthy borrowers who can afford the new terms, and most of the initial costs will be made up. Ultimately this is a question that most observers say cannot be answered until one of the plans is implemented. If an FHA refinancing plan works and does not result in massive government losses, it likely will not be seen as a bailout.
Are these plans targeting the right people?
Probably. According to Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc., there were 8.76 million homeowners at the end of March who had zero or negative equity in their homes, roughly 17% of all homeowners with primary mortgages.
Many homeowners facing foreclosure have negative equity; the FHA refinancing plans are designed to target that. "I would suspect that most of the homeowners in delinquency or default have zero or negative equity," Mr. Zandi said. "Otherwise, lenders would be willing to work with them."
What is the outlook?
Though the general concept has broad support, politics always finds a way of making things harder. Conventional wisdom is that with a consensus on approach, some iteration of the FHA refinance plan will go forward.
But there are many dicey procedural hurdles to a bill's enactment. Sen. Richard Shelby, the Banking Committee's No. 1 Republican, and House GOP members have already signaled opposition to the plans. Still, the administration's support for the base framework may ultimately make the Republicans accept a compromise.
"Momentum is on the side of doing something. … Given that it's an election year, the Democrats are going to want to get some credit for it, so I think we are heading for legislation," said Brian Gardner, an analyst with Keefe, Bruyette & Woods Inc.
