Housing-rescue bill: 'Something for everyone'

The House takes up a housing bill that Financial Services Chairman Barney Frank is betting will reel in Republicans who have called its main provision a bailout.

By Jeanne Sahadi, CNNMoney.com senior writer
May 7, 2008: 3:50 AM EDT

NEW YORK (CNNMoney.com) -- The House on Wednesday will begin debate on a housing package that would let the government back loans for homeowners at risk of foreclosure - a move many Republicans have opposed.

The centerpiece of the package is a proposal to let the Federal Housing Administration (FHA) insure up to $300 billion in new loans over four years if lenders agree to reduce the mortgage principal.

To qualify, the lender would have to cut the debt to no more than 85% of a home's appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.

The bill is sponsored by House Financial Services Chairman Barney Frank, D-Mass.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers and estimates doing so could cost $2.7 billion over 5 years.

The package is expected to pass the Democrat-led House - with some help from Republican congressmen representing states hard hit by the housing crisis.

But the bill also includes elements intended to attract the support of Senate Republicans and the White House, both of whom have expressed concerns that Frank's FHA rescue plan could amount to bailing out lenders and borrowers.

Those elements include "modernizing" the Federal Housing Administration (FHA) - for which both the House and Senate have already passed their own bills - and more stringent oversight of Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that guarantee the purchase and sale of home mortgages in the secondary market.

The housing package includes another measure the White House wants: letting states issue an additional $10 billion in tax-free municipal bonds, the proceeds from which could be used to subsidize mortgage refinancing for subprime borrowers. Under current law, state and local housing agencies are only allowed to issue tax-free bonds to help subsidize mortgages for first-time home buyers or those purchasing property in distressed areas.

When asked at a press conference on Tuesday whether it would be hard for Republicans to vote against his bill, Frank said, "When the president insists on three things and he's going to get them, all of them in a form acceptable to him, and then objects to a fourth ... which a third of the Republicans in the [Financial Services] committee voted for, and which the chairman of the Federal Reserve supported ... yes, I think it would be hard."

In a speech about the housing crisis on Monday evening, Federal Reserve Chairman Ben Bernanke did not explicitly endorse Frank's FHA proposal. But he said that for borrowers who meet certain debt-to-income ratios and own homes worth less than the mortgage debt owed on them, "the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender."

Trying to please all parties is part of compromise. But throwing in GSE reform and FHA modernization with the FHA rescue proposal carries some risk.

"We are moving toward an omnibus housing bill that includes something for everyone. The danger with massive bills is that they often collapse under their own weight. That is an increasing risk here," said Jaret Seiberg, senior vice president at the Stanford Group, a Washington policy research firm.