House Committee Passes Bill for New FHA Program; Final Piece of Housing Stabilization Legislation

Under the bill, the Federal Housing Administration (FHA) would set up a new program to encourage lenders to voluntarily forgive a portion of outstanding debt on troubled mortgages. In exchange for forgiving the debt, those mortgages would be refinanced and guaranteed by the FHA. FHA mortgage insurance guarantees that insured loans will be honored if covered homeowners are ever unable to meet their mortgage obligations. 

To qualify for the program proposed under the bill, lenders would voluntarily accept a payment of no more than 85 percent of the currently appraised value of the property as payment in full on the loan. Homeowners would be eligible only if they could reasonably be expected to repay the refinanced loan; and would have to share any profit from future home appreciation with the government.

Given a recent Standard and Poor’s report that home prices have dropped by an average of 12.7 percent over the last 12 months, and by as much as 20 percent in many larger cities where foreclosures are often concentrated, the portion of debt lenders would have to forgive in exchange for the guaranteed payment could be substantial. FHA would be authorized to insure up to $300 billion worth of loans under the program.

According to Financial Services Committee Chairman Barney Frank (D-Mass.), this and several other bills aimed at stabilizing the housing market will likely be combined into a single comprehensive housing stabilization measure that could be considered by the House as early as this week.

In addition to the FHA Housing Stabilization and Homeowner Retention Act, the measure will likely include: H.R. 5818, The Neighborhood Stabilization Act, which would provide $15 billion in loans and grants to state and local governments to purchase and rehabilitate foreclosed, vacant properties and to rehabilitate and operate rental properties; H.R. 5579, the Emergency Mortgage Loan Modification Act, which would provide a legal safe harbor from investor lawsuits for mortgage servicers that make certain loan modifications to prevent foreclosures; and H.R. 5720, the Housing Assistance Tax Act, which would allow state and local governments to sell an additional $10 billion in tax-exempt mortgage bonds to raise funds for refinancing the subprime mortgage loans of borrowers at risk of default and would make changes to the Low-Income Housing Tax Program to help stimulate the construction of new affordable rental housing.

H.R. 1427, the Federal Housing Finance Reform Act, which would reform the mortgage-finance giants Fannie Mae and Freddie Mac and the Federal Home Loan Banks and increase their ability to contribute to the credit available to lenders making home loans, and H.R. 1852, the Expanding American Homeownership Act, which would reform the Federal Housing Administration and permit FHA to offer larger loans to a greater number of borrowers, are also likely to be part of the housing stabilization package.

The Senate, which has already passed one housing stimulus measure, H.R. 3221, the Foreclosure Prevention Act, is readying a second bill that would establish a similar expansion of FHA insurance.

Senate Banking Chairman Christopher Dodd (D-Conn.) is writing the legislation and expects his committee to consider the bill soon, so that the Senate can include it in the House-Senate Conference negotiations that will take place after the House passes its housing stabilization package. Frank has stated he would like to send the legislation to the President before the August recess.