With rising numbers of credit-stressed mortgage borrowers falling behind on their payments, will Congress step in and throw them a lifeline...
WASHINGTON — With rising numbers of credit-stressed mortgage borrowers falling behind on their payments, will Congress step in and throw them a lifeline?
Will it transform the most consumer-friendly home-mortgage program for moderate-income buyers into a serious alternative for refinancers heading for default and foreclosure in high-cost communities coast to coast?
Both questions put the spotlight on major legislation now pending on Capitol Hill — the long-awaited modernization of the Federal Housing Administration’s (FHA) mortgage-insurance programs.
The House Financial Services Committee passed a reform bill earlier this month, and the full House is expected to take it up next month. Then it’s over to the Senate, where similar legislation crashed and burned late last year.
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But that couldn’t happen again, right? This year is different: The subprime mortgage market is in tatters, thousands of borrowers are facing personal financial crises triggered by “2/28” and “3/27” adjustable-rate loans originated in 2004 and 2005.
The artificially low monthly payments during the introductory periods of those mortgages are scheduled to reset upward — many in September, October and November, according to mortgage-industry experts.
Borrowers urgently need affordable, fixed-rate sources of refinancing money — loans that don’t come with draconian prepayment penalties, hidden fees or tricky rate structures.
Though the FHA reform legislation now on Capitol Hill is not specifically aimed at refinancing borrowers in trouble, it offers a compelling safe harbor: FHA’s fixed 30-year interest rates tend to be 3 percentage points or more below comparable subprime loan rates, and unlike the subprime mortgage industry in 2007, FHA is not sharply ratcheting back on new loan volume and tightening underwriting standards.
To the contrary, FHA is seeing a surge in new applications — with an unusually high percentage of refinancing requests — and is poised to do much more if Congress lets it raise its maximum mortgage amounts in high-cost areas such as California, the Northeast, the Middle Atlantic states and other parts of the United States.
The legislation would also let FHA cut down payments for qualified applicants to as low as zero, provide far higher levels of borrower counseling for homebuyers with rocky credit histories, and vary insurance premiums based on the credit risks posed by borrowers.
Given all this, you’d probably assume that FHA reform would be a slam dunk. But almost nothing on Capitol Hill is quite that simple. There are always snags. Here are a few that could affect the FHA bill:
• Even though FHA reform is a broadly bipartisan issue — the White House favors passage and the bill’s co-authors are two of the most liberal Democrats in the House, Rep. Maxine Waters of California and Financial Services Committee chairman Barney Frank of Massachusetts — some Republicans are not fans of deeper federal involvement in the mortgage market. They are predisposed to look for portions of the bill that they can attack or seek to remove, potentially stalling its consideration during a tight legislative calendar.
• One of the provisions drawing fire at the moment is a proposal by Frank that would divert some of the additional revenues generated by an expanded FHA — the agency has sent billions of dollars in profits during the past decade directly to the Treasury — and spend it on counseling to help financially troubled or unsophisticated applicants before they become home owners.
Other profits would be diverted to help fund technological improvements to the FHA program, and still others would be set aside for use in an “affordable housing fund.”
Some critics are worried that money that normally would flow to the federal treasury could end up subsidizing “affordable” mortgages for high-risk borrowers who really shouldn’t own homes — a charge that Frank staunchly denies.
• Lurking in the background are proponents of private mortgage insurance, FHA’s competitor in backing loans to homebuyers making minimal down payments.
Although a spokesman for the Mortgage Insurance Companies of America insists the group “has no position, we have nothing to say” about FHA reform legislation, lobbyists from some mortgage insurers played pivotal roles last year in sandbagging the FHA bill in the Senate, keeping it bottled up in committee and off the floor calendar.
There is no reason to expect them to back off this year — after all, a revived and competitive FHA, equipped with statutory authority to go head-to-head in the biggest and most profitable markets nationwide, could siphon away business.
Bottom line for reform: Slam dunk? No way. But the bill has a shot — either in its current form, or by having essential provisions transplanted into an appropriations bill that can sidestep the land mines buried and waiting in the Senate — without blowing up.
Kenneth R. Harney: firstname.lastname@example.org