Bush, House jockey over foreclosure fix
Administration and Democrats stake claims on best way to stabilize housing, while top banking regulators say House plan to stave off foreclosure could be useful.
NEW YORK (CNNMoney.com) -- The Bush administration Wednesday outlined a plan to help homeowners at risk of foreclosure in an attempt to get out ahead of a more sweeping proposal by House Democrats.
Discussion of both plans, at a House Financial Services Committee hearing, highlighted the complex fault lines in the debate over how far the government should go to ease the mortgage crisis. It's a tough question since there's plenty of blame to go around: Lenders, brokers, investors, ratings agencies, federal regulators and some homeowners all played a part.
"No single solution or silver bullet can address the adverse effects," said Sheila Bair, chairman of the Federal Deposit Insurance Corp. "Resolving these issues will require a number of approaches emphasizing different solutions for different segments of the market."
Under the Bush plan, the Federal Housing Administration (FHA) would, for the first time, let some borrowers who are behind in their mortgage payments refinance into FHA-insured loans.
Such loans protect lenders in the event the borrower defaults. Borrowers would have to pay a risk-based premium for the insurance.
Currently, the FHA will only insure loans for borrowers who have a history of on-time payments for at least six months before their loans reset to higher rates.
The new plan is geared to those borrowers who are "financially capable but have a spotty credit record," said Brian Montgomery, assistant secretary for housing during his testimony announcing the plan. "We believe it is critically important to focus on those homeowners who are working hard to fulfill their obligations."
For delinquent borrowers who owe more than their house is worth, lenders would need to write down the loans to between 90% and 97% of the home's value.
He estimated the plan would take 60 to 70 days to implement.
Loosening refinancing requirements
The new guidelines mark the second time that the FHA - under its FHASecure program - has loosened its refinancing requirements to help struggling borrowers in subprime loans. Montgomery estimated that the new guidelines would help 100,000 homeowners and the FHASecure program as a whole will help more than 500,000 borrowers this year.
By comparison, House Financial Services Chairman Barney Frank, D-Mass., estimates that his FHA proposal could help 1.5 million borrowers.
Frank noted that it was a "remarkable coincidence" that the Bush administration put out its plan on the eve of the hearing to discuss his proposal. He nevertheless stressed the two plans' commonalities.
The White House plan marks the first time the administration will encourage lenders to write down principal, something housing advocates have been calling for for months.
"I'm pleased to see that the Bush administration now agrees with that approach," Frank said, warning that anyone who doesn't think principal should be written down in some cases will have to contend with both him and the administration.
Under Frank's plan, the FHA would be able to insure $300 billion in troubled loans for owner-occupied homes if lenders voluntarily write them down to at least 85% of the homes' appraised value.
The government would get a one-time payment from the lender equal to 5% of the new, smaller loan, and the borrower would pay a 1.5% annual premium payment. When the borrower sells the home he would pay the government a minimum of 3% of the original loan amount.
Give the servicers reason to modify
While the scope of both plans differs, their success relies on the voluntary participation of loan servicers, which housing advocates have criticized for being too slow or reluctant to modify a sufficient number of loans to stave off foreclosures.
The regulators testifying at the hearing gave high marks to Frank's plan, but said it needed to be amended to be most effective.
For instance, the FDIC's Bair noted that servicers need incentives to write down loans since their contracts with the mortgage investors they represent cover their costs for foreclosing on a home but not for modifying a mortgage.
Frank's plan would require lenders to write loans down to 85% of a home's appraised value. Bair said it would be better to have them write down to 80% and give 5% to the servicer and investment pool in equal increments over three years.
Frank acknowledged that servicers need incentives. But he expects them to cooperate and held out the threat of a heavy government hand if they don't.
"I want to put the servicers on notice: If we see a widespread reluctance [to voluntarily modify loans] they can expect much tougher regulation in the future," Frank said. 
