White House Presents Plan To Aid Subprime Borrowers

By Lori Montgomery and Dina ElBoghdady
Washington Post Staff Writers
Thursday, April 10, 2008

The Bush administration yesterday unveiled a plan to rescue 100,000 homeowners at risk of foreclosure by relaxing eligibility standards for government-backed loans and encouraging lenders to forgive a portion of their debt.

The proposal was quickly criticized by consumer groups, who said it would do little to slow a mortgage meltdown that last year threw more than 1.5 million households into foreclosure. But it was embraced by key Democrats, who said the White House is acknowledging that more aggressive government action is needed to help the most hard-pressed borrowers who owe banks more than their homes are worth because of plunging prices.

"There's consensus forming around the notion that we're not going to get to the bottom of this without some plan that involves more government involvement than merely nudging borrowers and lenders to work it out," said Jared Bernstein, a senior economist at the Economic Policy Institute.

Under the White House proposal, subprime borrowers who cannot afford their loans and have missed two or three mortgage payments would be eligible for assistance from the Federal Housing Administration. Lenders would be encouraged to forgive a portion of those loans for some of the most troubled borrowers so that they can refinance.

"Our plan will help hundreds of thousands of desperate families who have no place else to turn for safer, lower cost ways to keep their homes," FHA Commissioner and Assistant Secretary of Housing Brian D. Montgomery said in a written statement. "We want to be able to help families who are in the right house, but the wrong mortgage."

The plan is similar to significant elements of legislation proposed by House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.). The Democrats' proposal is far more ambitious, aiming to help as many as 2 million distressed borrowers by permitting the FHA to back refinanced mortgages for homeowners who are delinquent or in default.

Frank, who noted that the administration chose to announce its plan at a hearing on his bill, said the White House has "undercut" Republican lawmakers and other conservatives who continue to insist that the federal government should do nothing.

"The administration tried to stonewall," Frank said. But "they were running into a lot of political pressure. They were also being told by economists, including, I think, at the Fed, that you're not going to get out of this recession until you do something."

Lawmakers got the same advice yesterday from economists and federal regulators, who generally offered positive reviews of Frank's proposal. Randall S. Kroszner, a member of the Board of Governors of the Federal Reserve, called it "a useful tool in helping reduce preventable foreclosures."

Montgomery also offered encouraging words about Frank's proposal, saying in written testimony that administration officials "appreciate many of the concepts that underlie" the bill. But he then laid out a litany of "serious concerns," saying the plan would place taxpayer dollars at too much risk by allowing people with bad credit scores to qualify for loans that remain far too high for their income levels. White House spokesman Tony Fratto said Frank's proposal would "blow out FHA's underwriting standards."

The White House also opposes a provision in Frank's proposal that would create an auction process by which lenders could offer risky loans in bulk to the FHA by agreeing to refinance dozens of loans at time. "The market does not need a government entity to play this role," Montgomery said. He said that another provision -- which would provide $10 billion in loans and grants to state and local governments to buy vacant, foreclosed properties -- would "constitute a taxpayer bailout of lenders and speculators, while doing little to help keep struggling families in their homes."

Despite those criticisms, Montgomery closed his testimony by stressing a desire to cooperate with Frank. "There is a lot of common ground here," he said, "given our shared interest in using the FHA to help many Americans."

Today, Frank plans to continue hearings on his bill while Dodd opens hearings on a similar proposal. The Senate, meanwhile, is expected to vote on a much more modest housing plan that would offer tax breaks to homeowners, home buyers, home builders and other money-losing businesses. The White House yesterday sent a letter to congressional leaders expressing opposition to many provisions in the Senate bill.

The House Ways and Means Committee approved its version of the Senate's tax measures, which would create a tax credit for first-time home buyers, increase the availability of tax credits for developers of low-income housing, permit more families to deduct property taxes but would reject tax refunds for home builders and other businesses.

Frank said he is likely to roll his FHA legislation into a giant housing bill that also includes the House tax package, FHA modernization and regulatory reform of government-sponsored enterprises such as Fannie Mae and Freddie Mac.

FHA does not make loans; it provides mortgage insurance to borrowers through a network of private lenders. The agency charges borrowers insurance premiums, and the premiums provide the FHA with reserves to cover defaults.

Policymakers have debated an expanded role for FHA since at least 2006. Last August, in response to a sharp rise in foreclosures among subprime borrowers, the administration began focusing on that option to address the crisis without an act of Congress.

The FHA's first step was to offer government-backed loans to delinquent subprime borrowers with adjustable-rate mortgages, which start with tantalizingly low introductory rates that later spike. The borrowers could refinance into FHA, but only if they made payments on time for six months before their loans reset and only if the mortgages reset between June 2005 and December 2009.

That was the first time the FHA allowed delinquent borrowers to apply for FHA-insured loans. But consumer groups and lenders said the program was too narrow. Of the 150,000 borrowers who have tapped into the program, only 2,400 were delinquent.

Under the plan announced yesterday, subprime borrowers with adjustable loans who have missed two payments in the past 12 months would be eligible to refinance if they have at least 3 percent equity in their homes. And borrowers who missed three payments would be eligible if they have 10 percent equity.

With prices plunging in much of the country, many homeowners have no equity and may owe more than their houses are worth. For those homeowners, the FHA would encourage lenders to wipe out a sufficient amount of debt to meet the new FHA requirements.

Steve O'Connor, a senior vice president at the Mortgage Bankers Association, said "lenders are certainly going to explore that option" because they have an economic incentive to avoid foreclosure. But many consumer advocates say lenders have proven resistant to forgiving debt. In testimony, Kroszner called reductions of principal "quite rare."

Even if the FHA reaches 100,000 borrowers, "it's just window dressing," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition. "With over 2 million people expected to lose their homes over the next year and a half, helping 100,000 will not stem the foreclosure crisis."