U.S. steps up response to housing crisis

The Federal Housing Administration takes a bigger role under most emerging plans.

Amid reports that potential losses in the US housing crisis could near $1 trillion, Congress, the White House, and even the leading presidential candidates are converging on a strategy to create a federal safety net for hundreds of thousands of families facing the loss of their homes.

At the heart of the emerging consensus is a bigger role for the Federal Housing Administration in helping borrowers refinance loans they cannot afford to pay.

The issue is no longer if but how the Depression-era agency, eclipsed by new financial instruments in the boom years of the housing market, should ramp up fast enough to deal with the millions of homeowners facing foreclosure.

Just weeks ago, key players in the housing issue were settling in for sustained combat over whether government or the market should sort out the crisis. But lawmakers are hearing from voters that government inactivity is no longer an option.

"This is an issue that strikes to the heart of America because of the love Americans have for their homes and the very special place homes hold in our culture," says Allen Sinai, chief global economist at Decision Economic, Inc., who has been advising Democrats on the housing policy. "It's a major reason why we're seeing very encouraging cooperation on this issue."

After gridlocking on a housing fix on Feb. 28, the Senate last week passed a bipartisan housing rescue package on an 84-to-12 vote. The plan includes $4 billion to help communities purchase and rehabilitate foreclosed properties and $13 billion in tax breaks for builders and new home buyers.

Also last week, the White House announced its own plans to beef up FHA involvement in the housing crisis.

But the most ambitious effort is unfolding in the House Committee on Financial Services, where Chairman Barney Frank (D) of Massachusetts is working up a comprehensive housing plan that aims to help 1.5 million families stay in their homes. The proposed bill, which is expected to be taken up in committee next week, gives the FHA authority to guarantee up to $300 billion in refinanced loans, if the lenders agree to reduce the outstanding principal on those loans.

"The FHA is the only agency in the federal government that can go into crisis mode and quickly help hundreds and thousands of people," says committee spokesman Steven Adamske.

On the campaign trail, Sen. John McCain, the presumptive Republican presidential nominee, launched his own housing plan following in the footsteps of Democratic candidates Sens. Hillary Rodham Clinton and Barack Obama. Until recently, Senator McCain had rejected a larger role for the federal government in the housing crisis.

But all competing plans require an FHA that is up to the task of dealing with a crisis that industry experts say is uncharted territory. Bush administration officials say that they have been pushing for FHA modernization for two years and that Congress has yet to act.

"For more than seven months now, the president has been calling on Congress on a weekly basis to move modernization legislation in a form he could sign," says Tony Fratto, White House deputy press secretary.

In a surprise move last week, the Bush administration announced that it is taking administrative steps to expand FHA authority to refinance up to 500,000 homeowners facing foreclosure. Over the next several months, the FHA plans to implement administrative upgrades to help cope with the crisis.

Created in 1934 to stabilize a struggling mortgage market, the FHA has lost out in recent years to new subprime lenders, especially in high-cost housing markets such as California, Nevada, and Florida. The median income of all FHA home buyers in fiscal year 2007 was $50,760 and the median mortgage amount was $127,680, according to the FHA.

Congress increased FHA loan limits temporarily to $729,000 in its most recent stimulus plan, but the measure expires at the end of the year.

FHA officials want Congress to make those higher loan limits permanent.

"If they had passed FHA modernization, then we probably wouldn't have had all the problems we've had," says Brian Montgomery, commissioner of the Federal Housing Administration.

"The FHA can't improve itself without congressional approval," says David Kittle, chairman-elect of the Mortgage Bankers Association (MBA), who testified on the FHA role in the housing crisis before the Senate last week.

Just over a year ago, the FHA's market share was about 3 percent of new, single-family mortgages. But since July 2007, MBA's Kittle estimates that FHA's market share is closer to 9 percent "and climbing fast."

Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing and Urban Affairs Committee, is now working on a consensus for a broader housing bill to coordinate with Representative Frank's efforts in the House. The plan anticipates the FHA's guaranteeing up to $400 billion in refinanced loans.

"There is a tolerance level for what the Senate will do. I got as close as I could get," said Senator Dodd, after the Senate passed its bill on Thursday.

Sen. Richard Shelby (R) of Alabama, the top Republican on the panel, has not signed on to the new plan. He said Congress should "proceed with caution so as not to make or exacerbate the mistakes that have brought us to this point."

[Editor's note: The original version misspelled David Kittle's name.]