U.S. Ponders a New Deal for FHA

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, August 23, 2007

The combination of loose credit and rising prices during the recent housing boom brought the Federal Housing Administration to the brink of irrelevance. The agency has helped generations of Americans buy homes, but few needed its assistance when private loans were so easy to obtain.

Now, as the era of easy money yields to a credit crunch, the Bush administration is considering broadening the FHA's mandate to help borrowers avoid foreclosure. The administration is studying the possibility of allowing the FHA to take on mortgage refinancings for borrowers in default, something the agency is not currently permitted to do, a senior official at the Department of Housing and Urban Development said.

The government could make the change without action by Congress, the official said, adding that no decisions have been made.

The aim would be to help otherwise creditworthy borrowers get out of subprime mortgages that have escalating interest rates, the official said. The official was not authorized to speak for quotation by name.

Meanwhile, Congress is working on proposals to expand the FHA's reach in other ways, such as allowing it to take on bigger loans. Some of those efforts long preceded the meltdown in the mortgage markets but may get a push from recent events.

"FHA has a role to play in addressing both short-term and long-term concerns in this area," White House spokesman Tony Fratto said. Of the home buyers who took on subprime mortgages, "a significant segment of them would have been much better served by FHA programs," Fratto said.

Created in the 1930s during the Depression, the agency does not make loans but instead insures them. The insurance helps lower mortgages' cost to borrowers and makes the loans less risky for investors. Borrowers pay the insurance premium, and the agency has about $22 billion of reserves to cover defaults.

"The basic structure of government insurance has served the country pretty well through good times and bad. This is another time when the government needs to help out," the HUD official said.

One of the issues HUD is examining is how much more risk it would take on if it reached out to delinquent subprime borrowers.

The administration's interest in using the FHA contrasts with its resistance to easing limits on mortgage purchases by the federally chartered mortgage funding companies, Fannie Mae and Freddie Mac.

Some Democratic lawmakers have urged the administration to let Fannie Mae and Freddie Mac play a larger role. The administration says that Congress should pass legislation strengthening regulation of the companies, which have weathered separate accounting scandals. In addition, the administration says letting the companies buy more mortgages would not make a significant difference in the market segments where credit is tightest.

Unlike Fannie Mae and Freddie Mac, the FHA's business has been shrinking dramatically for many years. It insured only 3.9 percent of home buyers in April, down from 18.1 percent in fiscal 1990. In May, as subprime loans were drying up, the FHA's market share rose to 4.2 percent.

Part of the FHA's problem was that home prices outstripped its limits. In the most expensive real estate markets, such as the Washington area, FHA is limited to insuring loans of up to $362,790, less than the $417,000 ceiling for Fannie Mae and Freddie Mac.

The House Financial Services Committee in June passed a bill that would give the FHA more latitude. Senate Banking Committee chairman and presidential candidate Christopher J. Dodd (D-Conn.) canceled the scheduled markup of a related bill but said this week that he hopes to bring it up after the Senate returns in September.

In a statement issued by his office yesterday, Dodd said he is working with committee members "to find common ground on this important issue."

One question to be resolved is whether the FHA should be given flexibility to insure loans without a down payment.

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