By Dina ElBoghdady
Washington Post Staff Writer
Saturday, September 1, 2007
President Bush's plan yesterday to stem the rise of mortgage defaults put the spotlight on the Federal Housing Administration, which steadily lost relevance in recent years as more-aggressive private lenders came to dominate the marketplace.
Bush said yesterday that some subprime, or high-risk, borrowers would for the first time be able to refinance into loans insured by the FHA starting next week. He said the "government has got a role to play" in helping homeowners struggling to hold onto their homes.
The president's speech helped dissolve some of the partisan tension between congressional Democrats and administration officials, who have clashed on how to best respond to a mortgage crisis that surfaced last year when an alarming number of subprime borrowers started missing their monthly payments. Yesterday, several Democratic lawmakers said Bush had not acted boldly or swiftly enough, but they praised him for taking this action.
"This move has diminished what has been an ideological divide between us," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "The administration's view was that the market alone would take care of these problems, and our view was that we needed increased institutional participation in the near term."
Bush singled out the popularity of adjustable-rate mortgages with subprime borrowers as "one of the most troubling developments." Such mortgages start with low introductory rates that later rise sharply. As the higher rates kick in, some borrowers are caught by surprise and miss payments.
The FHA will offer those subprime borrowers the option of refinancing into loans it insures, but only if they made payments on time for six months before their loans reset to higher rates and their mortgages reset between June 2005 and December 2009.
The FHA does not make loans; it provides mortgage insurance to borrowers through a network of private lenders. Those lenders will consider only borrowers who have at least 3 percent equity in their homes and who can verify their incomes, a practice that often fell by the wayside in recent years as many lenders relaxed their standards.
The program, called FHA-Secure, is not a bailout for lenders who made bad loans or speculators who let their properties lapse into foreclosure when they could not flip them quickly, the president said. To avoid rewarding speculators, the FHA measure will not cover vacation homes or other homes in which borrowers do not live.
"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford," Bush said.
Jared Bernstein, a senior economist at the Economic Policy Institute, said the effect of the agency's program would be marginal for the economy but extremely relevant to those it helps.
By FHA estimates, the refinancing program will draw 60,000 delinquent borrowers in fiscal 2008. An additional 20,000 will come through a separate program, also announced yesterday, that would lower the cost of insurance premiums for homeowners who are less of a credit risk. That program would take effect in January 2008 and bring the number of FHA customers to 240,000.
For now, the FHA charges the same premiums to all borrowers regardless of risk. The premiums have provided it with reserves, now totaling $22 billion, to cover defaults. No public money is involved. By insuring loans, FHA makes its mortgages more affordable for borrowers and less risky for lenders.
Created in the 1930s, the FHA caters to first-time home buyers, minorities and low- to moderate-income families. Ninety to 95 percent of its customers are expected to be subprime next year.
What the president did not do yesterday was bring any money to the table, as some Democratic lawmakers and presidential candidates have proposed, Bernstein said. The president is empowered to create a fund for people who are not able to repay their loans.
Instead, the president embraced the ideas put forward by Democratic lawmakers, including Frank, Sen. Christopher J. Dodd of Connecticut and Sen. Charles E. Schumer of New York. "These are not his usual tennis partners," Bernstein said. "This is a moment of rare bipartisanship."
But some lawmakers want the president to do more. Schumer wants to see more funding for nonprofit groups that counsel homeowners on preventing foreclosures. In a written statement, he said he had secured $100 million in emergency funding in the Senate for such groups and he wants to increase the amount now that problems are deepening.
Yesterday, Schumer, Dodd and Frank also repeated their calls for the administration to help ease the credit crunch by giving more flexibility to Fannie Mae and Freddie Mac, the largest investors in U.S. mortgages. Many Democrats want the administration to expand Fannie Mae's and Freddie Mac's ability to purchase loans, something the White House has not endorsed. They're also pushing for tougher laws to curb abusive lending practices, which Bush said his agencies are doing already.
"For too long, this president has sat on his hands, as families were losing their homes and others called for action," Dodd said in a written statement. "We need the Federal Reserve to issue a strong regulation that will put an end to the predatory and abusive practices."
Yesterday, Bush focused his remarks mostly on the FHA. But aside from the refinancing measure, most of his other proposals await approval from Congress, including an FHA modernization bill that passed the House but stalled in the Senate last year.
That bill would lower the down-payment requirements and raise the limit on the size of loans that FHA can insure from $362,000 in states with high home prices to $417,000.
Kurt Pfotenhauer, senior vice president for government affairs and public policy at the Mortgage Bankers Association, said the president yesterday raised the profile of FHA, which has surfaced as one of the few viable alternatives for subprime borrowers now that so many subprime lenders have gone out of business.
"Right now, the FHA is the only game in town," Pfotenhauer said. "But that does not solve everyone's problems in the mortgage industry. A lot of people have lost their homes because they lost their jobs and the value of their home is devalued and they don't have the income to pay any loan."
People who are upside down on their loans, meaning they owe more than their homes are worth, may be out of luck under FHA-Secure because many of them probably do not have the required 3 percent equity in their houses.
The FHA measure also does nothing for prime borrowers whose loans are about to reset. "These problems with adjustable rate mortgages can happen to anyone, not just subprime borrowers," said Barry Glassman, senior vice president of Cassaday & Co..
Bush also endorsed legislation by Sen. Debbie Stabenow (D-Mich.) that would change tax law so that homeowners would not have to pay taxes on debt that their creditors forgive.