Congress's Second Chance to Save the Day

With more credit-stressed mortgage borrowers falling behind on their payments, will Congress step in and throw them a lifeline?

Will legislators 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?

Those questions put the spotlight on major legislation now pending on Capitol Hill -- the modernization of the Federal Housing Administration's mortgage insurance programs. The House Financial Services Committee passed an overhaul bill earlier this month, and the full House is expected to take it up in June. Then it's over to the Senate, where similar legislation crashed and burned late last year.

But that couldn't happen again, right? This year is different: The subprime mortgage market is in tatters, and 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 now scheduled to reset upward -- many of them 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.

Although the FHA overhaul legislation is not specifically aimed at refinancing borrowers in trouble, it offers a compelling safe harbor: The FHA's fixed 30-year interest rates tend to be three percentage points or more below comparable subprime loan rates, and unlike the subprime mortgage industry in 2007, the FHA is not sharply ratcheting back on new loan volume and tightening underwriting standards.

To the contrary, the FHA is seeing a surge in 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 and the mid-Atlantic. The legislation would also let FHA reduce down payments for qualified applicants to as low as zero, provide far higher levels of borrower counseling for home buyers with rocky credit histories and vary insurance premiums based on the credit risks posed by borrowers.

Given all this, you might 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, Reps. Maxine Waters (Calif.) and Barney Frank (Mass.), chairman of the Financial Services Committee -- 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 consideration during a tight legislative calendar.

· One of the provisions drawing fire is a proposal by Frank that would divert some of the additional revenue generated by an expanded FHA -- the agency has sent billions of dollars in profit during the past decade directly to the Treasury -- and spend it on counseling to help financially troubled or unsophisticated applicants before they become homeowners. Other profits would be diverted to help pay for 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 otherwise would go to the Treasury could end up subsidizing "affordable" mortgages for high-risk borrowers who really shouldn't own homes -- a charge that Frank denies.

· Lurking in the background are proponents of private mortgage insurance, the FHA's competitors in backing loans to home buyers making minimal down payments. Although a spokesman for the Mortgage Insurance Companies of America insists that 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 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 landmines in the Senate.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.