Realty Check

Bush And Barney Together On FHA Plan? Not Sure It Helps


Let me not to the marriage of true minds admit impediments, I always say (ok, you know I didn't say it), but this one boggles the mind.

As House Financial Services Committee Chairman Barney Frank was launching unveiled threats to lenders today that they'd better write down the value of troubled loans or face stiff regulation in the future, an FHA official dispatched by the Bush administration to Frank's hearing, announced a plan to save borrowers that mirrors Frank's idea. But the FHA official claims it wouldn't have any upfront costs.

Chairman Frank is proposing a bill that would have the FHA back 300 billion dollars worth of new loans if lenders write down the value of those loans to 85 percent of the home's value. This is of course because falling home prices have put many Americans underwater on their mortgages. The plan would cost a bunch upfront, and that means you and I foot the bill.

The Bush plan is for the FHA to call on those same lenders to write down principal and in turn the FHA will take on riskier borrowers. The way the FHA works is that it insures payment of a loan by charging the borrower an insurance premium. The FHA wants these premiums to now be risk-based, i.e. more expensive. Those higher premiums would help defray the cost.

The only difference in the plans is the expected scope. Bush administration officials claim this could help 100,000 borrowers. Frank thinks it could help 1-2 million borrowers. But I think they're both leaving out some key points:

1. Not all lenders are going to comply and eat the loans

2. Not all borrowers, many of whom have zero financial stake in their homes thanks to their crazy mortgage products, even want to be refinanced and on top of that pay high insurance premiums.

3. You still have to have pretty good credit to qualify, even if you've missed some payments, and that means it's not going to apply to an awful lot of subprime borrowers.

The FHA Secure program claims to have helped thousands of borrowers since its inception last summer, giving them new FHA loans. But in reality, only a fraction of those borrowers were actually in default.

The FHA can do its part, but the insurer itself is, according to the New York Times today, going to post losses for the first time in its history, thanks to the surge in delinquencies. Do we really want this taxpayer-backed entity to take on more risk?

Questions?  Comments?