It’s irrelevant how many are helped: Frank

It is unclear how many homeowners would be rescued from foreclosure through a plan proposed by Rep. Barney Frank (D-Mass.) that is gathering steam in Washington.

Frank himself now says it is “irrelevant” how many people will be helped under the plan, which Congress could take up over the next month.

{mosads}“I would hope a million [would benefit],” said Frank, chairman of the House Financial Services Committee. “It’s irrelevant. There’s no downside. Why not try?”

Facing the worst housing market in decades, members of both parties are scrambling to throw a lifeline to at-risk borrowers, and aspects of Frank’s plan, which he is working on with Senate Banking panel Chairman Chris Dodd (D-Conn.), have already been embraced by the Bush administration.

Yet some on the outside have expressed doubts that it will help the 2 million people his office initially indicated could be aided.

The industry is generally in favor of Frank’s proposal because it would be voluntary and would essentially give lenders and mortgage services another option to avoid foreclosure other than freezing interest rates or otherwise easing loan terms.

But the voluntary nature of the plan also makes it tough to pin down just how many would participate.

“That’s the million-dollar question,” as one industry lobbyist put it.

“We’re hard-pressed to see them getting their numbers,” said a financial services lobbyist. He added that an initial review of several companies shows that the proposal would not likely generate the 1 million to 2 million loans as drafted.

Nonetheless, momentum for Frank’s plan is clearly building.

After taking more timid steps to help borrowers, the Bush administration is now embracing its tenets, which would have the Federal Housing Administration (FHA) guarantee refinanced mortgages only after lenders shrink them so they are more affordable to borrowers.

The administration is working on a similar proposal, centered on the FHA, which it plans to implement through regulatory changes and on a much smaller scale.

{mospagebreak}Frank said that the move was “a good sign,” marking an improvement from the administration’s initial reluctance to do more than prod lenders to ease loan terms.

Yet he warned that some aspects of his plan might require legislation and that Congress, in any case, would act if the administration restricts the program to too few borrowers.

Republicans have been wary of heavy government intervention on behalf of homeowners, but their reluctance is cracking amid signs that the housing crisis is deepening.

{mosads}Democrats have been increasing pressure on Republicans to support them on measures to help homeowners after the Federal Reserve stepped in to guarantee $29 billion worth of Bear Stearns’s mortgage debt over the recess.

Senate Republicans struck a deal with Democrats on Tuesday, agreeing to craft legislation to help the housing market. Meanwhile, House Republican leaders on Tuesday met privately with Federal Reserve Chairman Ben Bernanke to get his insight on proposals to help the economy.

Frank and Dodd have taken steps not to create too sweet a deal for lenders at the expense of taxpayers by aiming to introduce an option that is just barely more attractive to lenders than foreclosure.

“We hope to make this as least likely a loser for the government,” Frank said at a press conference last month to unveil the details of his plan.

To qualify, lenders would have to write-down a mortgage by 15 percent. They would take this hit on the newly appraised value of the home, which because of the collapse of prices in some parts of the country would sometimes amount to a sizeable bite.

Take a $300,000 mortgage on a home that has seen its value decline by 10 percent. Under the Frank plan, the lender would write-down the loan to 85 percent of the house’s new market value, or $270,000. That amounts to a 25 percent loss on the lender’s investment that will never be regained.

Wall Street is already taking write-offs on soured mortgage-related assets, with UBS on Tuesday announcing a $19 billion write-down on such investments in the first quarter.

But marking losses for accounting purposes is not the same as erasing a portion of debt owed by a borrower.

And lenders’ appetite for Frank’s plan will depend to a great extent on the health of the home market.

If lenders believe prices will fall further, Frank’s plan would have appeal as a way to place a floor on losses.

But if they believe prices will stabilize or start to climb, it’s a bad bet.

“In general, the industry is supportive of the idea,” said Scott Talbott, senior vice president for government relations at the Financial Services Roundtable. “But the real test depends on whether you think home values are going to continue to drop or start to stabilize.”

Second mortgages pose another hurdle for the program. In 2006, at the height of the housing boom, nearly 40 percent of sub-prime borrowers took out a second, or “piggyback,” mortgage on their home, according to data compiled by the Fed.

Lenders of such loans have little hope of reclaiming their money given the current financial straits of sub-prime borrowers and because they are second in line to get repaid. But they still have a legal claim and could potentially put up a fight to stop the loan from being written-down.

“If there’s a piggyback second, it’s going to be a rare case that this FHA refinance is going to work,” predicted Eric Stein, the senior vice president for the Center for Responsible Lending, a group that represents borrowers.

A research team at Merrill Lynch crunched the numbers on the volume of loans originating in recent years that are now considered at-risk. They concluded that 1.5 million borrowers would qualify under the plan, nearly exactly the estimate that Frank’s office has offered.

However, the analysis did not appear to factor in the psychology of lenders weighing whether to participate or the potential glitch involving piggyback loans.