Foreclosure bill opens government to undue risks: FHA

By Al Yoon

BOSTON (Reuters) - Proposed legislation to expand the Federal Housing Administration's mortgage insurance program may be too far-reaching and open the government to undue risks, Federal Housing Commissioner Brian Montgomery said on Tuesday.

The U.S. House of Representatives Financial Services Committee chaired by Rep. Barney Frank last week approved a sweeping bill to enable the government to finance $300 billion in distressed mortgages to help two million homeowners avoid foreclosure.

An expansion of an FHA program already in place, called FHA Secure, would create fewer chances that taxpayers would foot the bill for the riskiest mortgages, Montgomery said during a panel discussion at a Mortgage Bankers Association conference.

"We are all trying to do the same thing ... but we want to make sure we are not doing it on the backs of the taxpayers," he said. The Frank plan "really throws the barn door open," he told a sparse crowd at the Boston MBA conference.

The mortgage industry continues to undergo a wrenching correction that has produced record rates of foreclosure and a downward spiral in home prices. The dire state of the market was palpable at the MBA's annual secondary markets conference, where attendance is off by more than 50 percent from 2007.

According to Frank, a Massachusetts Democrat, the new FHA program could cost the government up to $6 billion. Analysts at Citigroup calculated the Frank proposal could cost the government as much as $20 billion, but profits may reach $31 billion if homeowners do not re-default past expectations.

The FHA is central to foreclosure prevention programs since it has catered to low-income borrowers.

Volume at the agency sank during the housing boom as Wall Street investment banks gave lenders a lucrative buyer for their loans, but has soared since mid-2007 as lending standards tightened and easy access to capital dried up.

Loans guaranteed by the FHA totaled $54.8 billion in the six months through March, up from $25.8 billion for the same period a year earlier.

Federal Reserve Chairman Ben Bernanke in a speech on Monday urged lawmakers to move quickly on legislation expanding the reach of the FHA to help reduce foreclosures, which he said have "substantial spillover effects" on housing, financial markets and the U.S. economy. Foreclosure filings last quarter more than doubled from a year earlier.

Montgomery said the FHA is making administrative changes that will expand FHA Secure -- a program initiated last year to ease refinancing for homeowners facing unaffordable payments -- to allow refinancing to borrowers already in default. Broader changes sought by lawmakers could mean taking on loans destined for default, he said.

"There are a lot of loans out there that shouldn't have been made in the first place," he told reporters.

The commissioner also said the FHA was moving forward with risk-based pricing on it insurance program, which would raise costs for the riskiest borrowers and reduce premiums for more creditworthy homeowners. A notice will be posted in the federal register as early as Tuesday, he said.

Expanding FHA Secure would also provides a refinancing alternative that would allow lenders to voluntarily write-down principal on a loan, Montgomery said last month. Write-downs are also part of the Frank plan, which analysts say are needed since falling house prices have reduced the value of many homes to less than the balance of the loans.

(Editing by Gary Crosse)