By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, July 9, 2008
The nation's top housing official yesterday criticized elements of a legislative package that aims to dramatically expand the Federal Housing Administration's role in responding to the mortgage crisis.
Taxpayers could end up absorbing "preventable and foreseeable losses" if the final bill does not include initiatives that the administration has long advocated, Housing and Urban Development Secretary Steve Preston said in a call with reporters.
The legislation, passed by the House and pending in the Senate, would allow distressed borrowers to trade mortgages with rising payments for more affordable FHA loans if their lenders forgive a portion of the debt.
If enacted, the FHA would take on riskier loans than it is used to, which could financially overwhelm the agency if safeguards are not in place, said Preston, who has been secretary for a month.
To that end, the administration is urging Congress to allow the FHA to charge borrowers insurance premiums based on credit risk instead of the one-size-fits-all premiums in place since the FHA's creation in 1934.
These premiums cover losses tied to defaults and foreclosures. The FHA plans to adopt risk-based pricing on July 14, but the Senate version of the bill would bar the change. Backers argue that a credit-score-driven program would hurt lower-income borrowers. The FHA disagrees.
The House version of the bill is mum on risk-based pricing.
But the House bill does include a provision that would continue to allow popular seller-funded down-payment assistance programs, which make up about a third of FHA loans. In those programs, home sellers give money to a charity, which then helps buyers make down payments.
For years, the FHA has tried to eliminate these programs, without success. Now it is attempting once more to write rules that would ban this funding. But those rules would be moot if the House provision survives, creating unprecedented financial problems for the agency, argued Preston, who was joined by FHA Commissioner Brian Montgomery.
By law, the FHA must break even each year, meaning it must collect as much in premiums as it pays to cover foreclosure-related losses. If at the start of a fiscal year the FHA estimates it cannot do that, the Senate and House appropriations panels make up the shortfall using taxpayer money.
Because of the poor performance of seller-funded down-payment loans, the FHA may ask for $1.4 billion in appropriations for the fiscal year beginning Oct. 1 -- the first such appropriation in its history.
Some who track the FHA said the agency's most recent push to derail seller-assisted down payments and institute risk-based pricing is a self-defense mechanism.
"Some of this is laying the marker to shift responsibility off of the FHA's shoulders if, down the road, there is a fiscal problem with the insurance fund," said Howard Glaser, a mortgage industry consultant. If the FHA is under stress this time next year, he said, "supporters of the administration's position can then say: 'We argued for tighter credit standards when this legislation was being developed.' "