Capitol Hill Deals with Housing Problems in Several Venues

The House Financial Services Committee began two days of hearings Wednesday on the economic, mortgage, and housing rescue plan announced last week by Committee Chairman Barney Frank.

The two day hearing, on April 9 and 10 will include testimony from federal regulators, academics, economists, and representatives of cities and communities being negatively impacted by large numbers of foreclosures.

Frank's bill, which is a companion to one being sponsored by Senator Chris Dodd on the other side of the Capitol, includes the following provisions:

• Permits FHA to provide [up to $300 billion] in new guarantees that would help to refinance at-risk borrowers into viable mortgages. In exchange for agreeing to a substantial write-down of principal, the existing lender or mortgage holder would receive a short payment from the proceeds of a new FHA guaranteed loan if the restructured loan would result in terms that the borrower can reasonably be expected to pay. The existing lender or mortgage holder would have no further credit exposure to the borrower. This could potentially refinance between 1 and 2 million loans (and help these families stay in their homes), protect neighborhoods and help stabilize the housing market.
• Permits the loan program to be used to refinance and guarantee mortgages through a facility that would provide for auction or other mechanism to refinance loans on a bulk basis.
• Provides $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes with the goal of occupying them as soon as possible.

Also on Tuesday the Senate moved closer to a vote on its version of a rescue bill for the housing market by voting 92 to 6 to limit debate by invoking cloture. The Senate bill, however, has a long way to go before becoming law.

The White House has announced that it is not pleased with some sections of the Senate bill, principally a $7,000 tax credit for homeowners who buy homes in foreclosure as their primary residence and a much National Association of Home Builders promoted revision to the tax code which would allow home builders to carry back current losses a maximum of five years and apply them against tax returns filed in years when the builders were profitable. A White House spokesman said that the bill in its current form would bail out lenders and speculators and pass the costs on to Americans "who play by the rules and honor their mortgage debt." A veto is threatened.

Whatever the final version of the bill the Senate finally passes, it will have to be reconciled with legislation originating in the House before going to the President for signature and House leaders are also not happy with Senate initiatives but for very different reasons than those given by the White House.

The House is likely to push for a version that is less friendly to business and more tailored to relieve homeowners, particularly first time buyers, and investors in low-income housing.

Meanwhile, with the White House, the Federal Reserve, and Congress including the Federal Housing Administration (FHA) as a lynchpin in their various housing rescue plans, The New York Times is reporting that agency is itself on shaky financial grounds.

FHA insures home loans for many first-time minority and lower-income buyers and is being proposed as guarantor of a variety of types � depending on who is talking � of loans that would help take homeowners out of their current subprime loans, particularly those where the loan amount exceeds the current value of the home. However, the agency is apparently about to post its first deficit in its 74 years of operation because of one particular sector of its mortgage portfolio.

According to The Times the loans, issued under the seller-financed down payment program, has suffered from high delinquency and foreclosure rates recently. This type of loan requires a home seller to cover the buyer's down payment with the assistance of a nonprofit company and then that sum is added to the total cost of the house (thus being amortized over the life of the mortgage.) Use of this type of loan has skyrocketed from less than 2 percent of FHA insured loans in 2000 to 35 percent last year and has a foreclosure rate two to three times that of more traditional FHA loans and may result in a $1.4 billion deficit for FHA in fiscal 2009.

The head of the FHA is expected to testify in the House Finance Committee hearings on Wednesday and we will report on his prepared testimony and that of others at the hearing.