March 13, 2008 / 4:25 PM / 10 years ago

Key lawmakers seek wider FHA role in mortgages

WASHINGTON (Reuters) - Two top lawmakers proposed on Tuesday giving the Federal Housing Administration (FHA) a bigger role in tackling the nation’s worsening home mortgage and foreclosure crisis.

Under legislation unveiled by the lawmakers, the FHA would be permitted to offer $300 billion more in new guarantees to help refinance distressed mortgages that banks and mortgage holders have agreed to significantly write down.

House of Representatives Financial Services Committee Chairman Barney Frank said the proposal, which he warned could change, would help refinance up to two million home loans.

It would also provide $10 billion in loans and grants to states to buy and fix distressed properties, said Frank, a Massachusetts Democrat.

“There is no bailout for those who made the loans. ... The lenders are going to have to take their losses,” he told reporters at a briefing. “This will be some help to homeowners, but not with tax dollars.”

Sen. Christopher Dodd, chairman of the Senate Banking Committee and a Connecticut Democrat, backed Frank’s general approach to FHA-backed refinancing and expressed concern about persistently discouraging news in the housing market.

“No one knows where the bottom is in this. ... What we’re trying to do is here is create a floor,” Dodd said.

FHA was created during the Great Depression to help high-risk or low-income borrowers win better loan terms by insuring mortgage payments.

Several approaches are circulating in Congress to deal with falling home prices, rising foreclosures and slumping activity in credit markets. But no substantive action was expected until after lawmakers return from a spring recess that begins on Friday. Congress is scheduled to reconvene in early April.

Under the proposed program, a lender or mortgage holder which agrees to reduce the principal of a troubled loan could get a payment from the proceeds of a new FHA-insured loan, if the restructured loan would result in terms the borrower could reasonably be expected to pay, Frank said.

The original lender or mortgage holder would get a cash payment and no further exposure to the borrower, he said.

Borrowers or loan servicers could contact an FHA-approved lender, which would determine the size of a loan that would fit the program and the borrower’s ability to repay.

“If the current lender or mortgage holder agrees to a write-down that is sufficient to meet the requirements of the program and make the new loan affordable, the FHA-lender will pay off the discounted existing mortgage,” he said.

Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn

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