Eyeing mortgage crisis, panel could strike deal on FHA bill

As investors and lenders stampede away from risky home loans, the Senate Banking Committee is hashing out a narrow bill that may be the most serious response by Congress to the troubles rocking the mortgage market.

Sens. Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.), the committee’s chairman and ranking member, are likely to strike a deal soon on legislation sponsored by Dodd and Sen. Mel Martinez (R-Fla.) to revitalize the federal agency that guarantees home loans to people who may not otherwise qualify for mortgage insurance, according to several financial services lobbyists.

{mosads}Reforming the Federal Housing Administration (FHA) “is significantly less controversial and more narrow than some of the other proposals that have been out there,” one lobbyist said. “It’s an issue that unites a lot of interest groups.”

The FHA, which fell into the doldrums in recent years with the explosion of exotic mortgage products, is seen by many as the best hope for keeping distressed borrowers in their homes and preserving access to mortgages for first-time or low-income homebuyers.

In May, the House Financial Services Committee passed legislation to modernize the FHA. The Bush administration and the financial services industry now are seizing on the turmoil in the mortgage market to prod the Senate to act following the August recess.  

“To the extent that product choices will be eliminated in the marketplace, there is a need for additional options. And the FHA has proved a very safe and reliable choice for consumers,” said Steve O’Connor, senior vice president for policy at the Mortgage Bankers Association.

“I think this is a window of opportunity we have to pass this bill,” said Megan Booth of the National Association of Realtors.

By contrast, other proposals for easing the turmoil in the mortgage market seem to face a steeper climb. Sen. Hillary Rodham Clinton (D-N.Y.) last week announced she would unveil legislation to set up a $1 billion fund to prop up state programs that help borrowers avoid foreclosure. But President Bush has rejected calls to use taxpayer funds to bail out borrowers, and voiced doubt about appeals by Sen. Charles Schumer (D-N.Y.), Dodd and others to lift the caps on Fannie Mae’s and Freddie Mac’s mortgage portfolios so that they can provide more liquidity in the market.

The legislation passed by the House panel addresses key administration demands by authorizing the FHA to guarantee no-money-down loans, allowing it to price loans for risk and raising its loan limits so that it can serve more borrowers in high-cost areas. Similar legislation passed the House by wide margins last year.

Revamping the FHA has proved more challenging in the Senate due to the slim Democratic majority on the Banking Committee and Republican concerns that a fortified FHA could pose a risk to the taxpayers and crowd out private mortgage insurers. FHA reform was pulled from a Banking Committee markup before the recess amid disagreement between Dodd and Shelby over the substance of the bill, according to lobbyists.

Dodd said he was working with Shelby as well as Martinez, Schumer, Sen. Jack Reed (D-R.I.) and others to “find common ground” on the issue. “A reinvigorated FHA can help offer American homebuyers a much safer and more stable alternative,” Dodd said.

 A sticking point is the no-money-down provision. Currently, the FHA insures loans only when the borrower makes a 3 percent down payment. Lobbyists expect a Dodd-Martinez bill to relax the requirement to 1.5 percent “cash down,” in the form of a down payment, closing costs or other expenses. But that might not be enough to appease Shelby, who has voiced skepticism about expanding the FHA, lobbyists said.

“One lesson learned from the current pattern of defaults and delinquencies in the sub-prime market is that those borrowers with little or no equity in their home will be the most likely to fail,” Shelby said at a Banking Committee hearing on FHA reform last month.

Allowing the FHA to engage in risk-based pricing has also proved controversial. Proponents argue that letting the FHA price for risk will free up more capital to reach more borrowers. But a Dodd-Martinez bill is unlikely to include the provision due to objections from Sen. Elizabeth Dole (R-N.C.), a Banking Committee member whose state is home to many private mortgage insurers, lobbyists said.

The Senate legislation is expected to follow the House and lift the loan limits for the agency. At present, the FHA can insure mortgages no larger than 85 percent of the conforming-loan limits applied to Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that buy mortgages. The House legislation would raise the cap to 100 percent of the GSE-conforming loan limits.

The Dodd-Martinez bill is also likely to institute a pilot program for the FHA to reach borrowers with so-called “thin credit files,” often immigrants who pay rent and other expenses in cash. The mortgage industry would back such a proposal.
“We’re hugely supportive of using means other than credit scores to qualify people for mortgages,” Booth said.

Proponents say FHA reform would deliver a much-needed jolt to an agency that saw its market share dwindle to 6 percent in 2005 from 19 percent in 1996, according to a June report from the Government Accountability Office. FHA-backed loans have plummeted especially sharply in high-cost areas such as California as the agency’s loan limits have not kept up with soaring home prices.

 The FHA cites its strong record of keeping troubled borrowers in their homes as a reason it ought to play an expanded role.
In 2004, more than 78,000 borrowers were able to avoid foreclosure due to the FHA’s loss-mitigation program, according to a recent Housing and Urban Development (HUD) report. More than 90 percent of those borrowers had held onto their homes in 2006. “Because we’re the government, we require the lenders to work with the borrowers to allow people to stay in their homes,” a HUD spokesman said.