House takes up bills to help financially at-risk homeowners

WASHINGTON — The House of Representatives will take up legislation Wednesday that would broadly address the nation's housing crisis and could have the government assume control of up to $300 billion in refinanced home loans to be given to distressed homeowners.

The measures are the Democrats' effort to take the lead in addressing an economic crisis that's dominating American life and, increasingly, the presidential campaign.

The full House will vote on the FHA Housing and Homeowner Retention Act, which is being pushed by Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee. It seeks to expand Federal Housing Administration refinancing efforts to help at-risk borrowers who could lose their homes to foreclosure.

House lawmakers also will take up a bill to authorize the federal government to provide $15 billion to allow state and local governments award loans and grants to purchase and rehabilitate owner-vacated foreclosed homes. The idea is to prevent foreclosed homes from sitting on the market for long periods of time, inviting crime and dragging down prices of nearby homes.

They'll also take up a measure from the tax-writing Ways and Means Committee to give a $7,500 tax credit for first-time homebuyers to stimulate demand for home buying. The measure also would provide a one-time standard deduction on federal tax forms for state and local real estate taxes, up to $350 for single filers and $700 for joint filers. The tax measure also would increase by $10 billion the amount of tax-free bonds that can be made available by states to help first-time homebuyers with low incomes and for construction of low-income rental housing.

Implicit in the Democrats' legislation, which won bipartisan support coming out of the two committees, is the view that efforts to date by the Bush administration and the private sector have been inadequate.

The House bills seek to amend legislation already passed by the Senate. Frank has pledged to get legislation to President Bush by July 4. In a move to bring more Republicans on board, the Democrats' legislation includes changes called for by the White House, namely the modernization of the FHA and new rules for quasi-government mortgage bundlers Fannie Mae and Freddie Mac.

But the loan-guarantee proposals are controversial. Bush hasn't formally threatened a veto, but his Department of Housing and Urban Development issued a scathing news release late Tuesday that implied one.

The House legislation won general support Monday from Federal Reserve Chairman Ben Bernanke and hasn't drawn criticism from Treasury Secretary Henry Paulson, the administration's point man on the housing crisis.

But the HUD statement said its FHASecure program is successfully helping to refinance distressed mortgages while maintaining strict underwriting standards.

HUD said the House legislation is "financially risky, rewards irresponsible behavior and mandates a loosening of FHA underwriting standards, which would put taxpayers on the hook." It mischaracterized Frank's bill, complaining that "it mandates principal reductions" on loan values.

It does not.

The program in the House legislation would be voluntary — something that GOP members insisted on — and would apply only to mortgages where lenders or loan-service companies voluntarily agree to substantial write-downs of principal on mortgages. These lenders or loan service companies would have to agree to accept as payment in full for existing loans no more than 85 percent of properties' current appraised value. That's important, because it means that lenders agree to swallow a significant loss — something Bernanke has called on them to do.

In exchange for taking the hit, the FHA would guarantee the loans. The lenders could rest assured of receiving that value on the reworked loans, no matter what happens. The government, and therefore taxpayers, would be on the hook only if borrowers still default and only if the amounts recovered in foreclosure are less than the value of the reworked loans.

Frank would have preferred this program to be mandatory, and his legislation includes a provision that instructs the Federal Reserve to study the need for an auction or bulk refinancing mechanism that would get the government in the business of auctioning properties, not unlike the aftermath of the savings and loan crisis from 1989-'93.

"You can't always get what you want exactly," Frank told reporters Tuesday, confident that his bill represents a compromise that will pass.

Giving urgency to some sort of legislative action, Fannie Mae on Tuesday reported staggering first-quarter losses of $2.19 billion and warned that additional mortgage defaults could lead to even wider losses next year. Loans owned or guaranteed by Fannie Mae that were 90 days or more past due nearly doubled in the first quarter, although they still are only about 1.15 percent of all single-family mortgages in Fannie's portfolio.

To learn more:

Foreclosure Prevention Act:

Highlights of the Act:

Ways and Means bill going to floor:

The highlights of the housing-related tax bill: