NEW YORK (CNNMoney.com) -- The House on Thursday passed a contentious foreclosure-prevention package, which still faces a veto threat from the White House and an uncertain fate in the Senate.
In a 266-154 vote, lawmakers approved a proposal, sponsored by House Financial Services Chairman Barney Frank, D-Mass., 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 current appraised value. If the FHA-refinanced loans went into default, the FHA would pay the lender the remaining principal owed.
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 - of which $1.7 billion could be a cost to taxpayers.
Opponents of the bill contend it's a bailout for lenders, investors and "speculators" who took on imprudent risk. And because participation in the program would be voluntary on the part of lenders, critics contend lenders would only unload their riskiest loans into the federally backed program.
Supporters note that the program is limited to loans for owner-occupied residents, not speculators. They also make the case that lenders and investors would be taking a loss on every loan, and that the borrower would be paying higher-than-usual premiums to the FHA to insure the loan and would share equity in their home with the government.
Supporters also say if the borrower still can't afford the loan when it's written down to 85% of appraised value, their loan won't qualify for the program. If the bill is a bailout for anyone, they say, it's a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures.
Earlier on Thursday, the House passed a bill that would send states $15 billion to buy and fix up foreclosed properties - a measure the White House also opposes.
Frank's bill also includes elements intended to attract the support of Senate Republicans and the White House. Two key ones: modernization of FHA guidelines - 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.
Nevertheless, late Tuesday, the White House issued a statement threatening to veto the bill in its current form. Analysts see the move as a tactical one intended to give Republicans more leverage in the negotiations.
That leverage is seen in the Senate, where Banking Committee Chairman Christopher Dodd, D-Conn., and ranking minority member Richard Shelby, R-Ala. are negotiating a housing package that could include GSE reform, FHA reform, and a Dodd FHA rescue proposal similar to Frank's.
When asked if Frank's proposal is something he could support, Shelby told CNN's Jeanne Meserve, "I'd have to evaluate it - how we're going to pay for it., what it's really going to do, do we really know if housing prices have bottomed out."
When asked if it was possible Congress would end up doing nothing, Shelby said, "The best of me says we ought to try to work this project out, see if we can have GSE reform, see if we can have FHA reform, and see if we can reach some kind of accommodation on housing." See Also
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