House pushing plan to expand FHA’s role in mortgages and housing grants

WASHINGTON – Sept. 18, 2007 – Looking to help homeowners avoid foreclosure, the Democratic-controlled House wants to insure mortgages and provide affordable housing grants well beyond limits favored by the Bush administration.

The House bill would allow the Federal Housing Administration (FHA), which insures mortgages for low- and middle-income borrowers, to back refinanced loans for tens of thousands of borrowers who are delinquent on payments because their mortgages are resetting to sharply higher rates from low initial “teaser” levels.

The measure is Congress’ first legislative response to the mortgage-market tumult of the summer.

The White House wants to expand the mandate of the Depression-era FHA, part of the Department of Housing and Urban Development, to allow it to insure loans of delinquent borrowers that are refinanced to lower rates.

However, the administration objects to a plan by Financial Services Committee Chairman Rep. Barney Frank, D-Mass., to raise the limit on the size of mortgages FHA can insure to $500,000 in high-cost areas of the country from the current $362,000, to be added to the House bill being put to a vote Tuesday.

“The program should remain targeted to traditionally underserved homebuyers, such as low- and moderate-income families,” the White House said in a statement Monday.

Overall, the House bill makes crucial and desirable improvements but has raised “a number of significant concerns” for the administration, it said.

The administration wants the FHA loan limits to be raised to $417,000 in high-cost areas and from $200,000 to $271,000 in lower-cost ones.

Also opposed by the administration is a $300 million-a-year fund for grants for affordable housing, which would be financed from FHA revenues.

In the Senate, legislation being proposed by Senate Banking Committee Chairman Christopher Dodd, D-Conn., and the panel’s senior Republican, Sen. Richard Shelby of Alabama, would raise the limit to $417,000 from $362,000. The committee is expected to vote on the measure Wednesday.

Dodd, who is one of the longshot candidates for his party’s presidential nomination, has made the mortgage distress a major issue and last month summoned Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson to meet with him on Capitol Hill to discuss remedies.

Government officials and real-estate industry interests maintain that the FHA, which now backs some 3.7 million loans in the event of default, is hamstrung by existing law. The size of mortgages the agency can insure is often too small to attract borrowers in expensive areas such as California and the Northeast – reducing the FHA’S share of the home-loan market to around 4 percent from 19 percent a decade ago.

An estimated 2 million to 2.5 million adjustable-rate mortgages are scheduled to “reset” this year and next, jumping from low “teaser” rates for the first two or three years to much steeper rates that could cost borrowers their homes. The issue has brought politically charged debate in recent weeks over possible responses by the government, while turbulence in financial and credit markets resulting from the mortgage upheaval has cast a shadow over the economy and raised the specter of a possible recession.

Administration officials have said the full impact on the economy of the worst housing slump in 16 years and wildly gyrating financial markets has yet to play out. Wall Street has been betting on an interest-rate cut by the Federal Reserve – the first in more than four years – at its meeting Tuesday, to prod millions of borrowers to spend and invest more and thereby revitalize the economy.

Defaults have surged in recent months on high-risk subprime mortgages, loans that were extended to borrowers with weak credit histories. The rising tide of soured loans forced a number of lenders into bankruptcy, while hedge funds and other big investors in securities backed by subprime mortgages took deep financial hits.

The House bill is H.R. 1852.

On the Net: Congress: http://thomas.loc.gov/

Copyright 2007 The Associated Press. All rights reserved, Marcy Gordon, AP Business Writer. This material may not be published, broadcast, rewritten or redistributed.

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