FHA chief warns on Congress housing rescue bill

By Patrick Rucker and Kevin Drawbaugh

WASHINGTON (Reuters) - A congressional plan to save troubled U.S. homeowners from foreclosure could hurt the economy and affect the government's ability to help deserving homeowners, a senior Bush administration official said on Monday.

"Some in Congress are advancing legislation that, while well intentioned, could be problematic for the economy and the country," said Brian Montgomery, who heads the Federal Housing Administration, in a speech at the National Press Club.

Legislation due to be voted on later this month by the U.S. Senate would create a new FHA fund to insure up to $300 billion in home loans. The legislation, which could save 500,000 borrowers from foreclosure, has already cleared the U.S. House of Representatives. But it has not been wholeheartedly embraced by the Bush administration.

"FHA is designed to help stabilize the economy. ... It is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans," Montgomery said.

Congress is trying to hammer out a broad plan to help homeowners as foreclosures soar and home prices plunge in a severe housing crisis that is hitting some areas harder than others, such as Florida, Arizona, Nevada and California.

FHA is the largest federal homebuyer assistance program. It insures a borrower's monthly loan payments. Policy-makers agree it can be retooled to help many troubled homeowners.

Montgomery warned in his speech, however, that some plans might be too bureaucratic and loosen loan standards too much.

"We don't want to dramatically enlarge FHA's portfolio, with a substantial portion of the portfolio problematic, high-risk loans that cost homeowners who were careful and bought homes within their means," he said.

He criticized private downpayment assistance programs that he said were stuffing the FHA with risky loans.

As much as a third of the FHA's mortgages rely on private downpayment assistance. These loans default at a rate three times higher than other FHA loans, he said.

"We are concerned about this business because the substantial losses affect FHA's bottom line and FHA's ability to serve American citizens who need access to prime-rate home loans," he said.

Montgomery said the FHA would present new arguments for banning private downpayment assistance. A spokesman said those arguments were meant to satisfy questions raised by lawsuits involving the FHA order.

Scott Syphax, president and CEO of Nehemiah, one of the two largest downpayment aid firms, encouraged consumer groups and others to oppose the FHA plan.

"At this time, it is critical that the consumer groups, policy makers, government and elected officials, real estate industry and those who serve first time homebuyers in this country stand up and fight this rule," he said in a statement.

(Written by Patrick Rucker and Kevin Drawbaugh)