For FHA, a Huge Task and Uncertain Role

"With the collapse of the subprime lending business, [the FHA] has started to rise not only from its own ashes but from the ashes of the larger mortgage market," said Guy Cecala, publisher of Inside Mortgage Finance. "Many are pinning their hopes on the survival of a booming FHA business."

Brian Chappelle, who oversaw the FHA's loan production activities in the mid-1980s, said the bulk of the agency's new business is coming from solid borrowers who want to refinance their conventional loans into cheaper FHA mortgages.

"The FHA is getting a much better-quality borrower than it is used to," said Chappelle, who now runs Potomac Partners, a mortgage banking consulting firm. "Those borrowers' premiums will keep the fund healthy and growing."

FHA officials said any gains the agency makes by attracting more creditworthy borrowers would be offset by an influx of poorer-quality ones if Congress adds to the FHA's loan volume.

Frank and Sen. Christopher J. Dodd (D-Conn.) have each offered legislation in their respective chambers aimed at rescuing borrowers who owe more than their houses are worth.

The Frank legislation, which the House expects to vote on today, would allow certain borrowers to refinance into FHA loans if their lenders agree to forgive a portion of their debt and if their loans were issued before Jan. 1, 2008.

The program could nearly double the FHA's loan portfolio by granting it authority to insure an additional $300 billion of mortgages.

During a speech Monday night, Federal Reserve Chairman Ben S. Bernanke appeared to endorse an expanded FHA role that would encourage lenders to write off a portion of debt for borrowers who owe more than their homes are worth.

The Congressional Budget Office estimates that the Frank bill would cost taxpayers $2.7 billion from 2008 to 2013 and help 500,000 borrowers -- less than the 1 million initially projected by supporters.

Frank, who heads the House Financial Services Committee, said he's confident that the FHA could handle the cost and workload because it would receive additional money and personnel to administer the four-year program.

Frank said using the FHA is logical. "The alternative would have been to create a new agency from scratch, which would have guaranteed that we would not get prompt action," he said in an interview. "By the time it got fully operational, we wouldn't need it anymore."

But FHA officials said the proposal was "extreme" and "overly prescriptive." The administration prefers the more targeted program it launched in August, called FHA Secure. That refinances only subprime, adjustable-rate loans and only for those who missed no more than three payments. The Frank bill applies to all loans without regard for the borrower's payment history. FHA Secure has refinanced loans for about 180,000 borrowers, only 3,000 of whom were delinquent. Initially, the administration said it would reach 60,000 late borrowers.