Democrats unveiled a new plan last week that will allow the FHA to buy $300 billion in delinquent, underwater mortgages…
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Democrats unveiled a new plan last week that will allow the FHA to buy $300 billion in delinquent, underwater mortgages. The initial cost to taxpayers is estimated to be $20 billion.
BY PAT SUMMERS
The Congressional Democrats have been pushing for the government to get more involved in the mortgage crisis for some time now. Last week, they moved closer to achieving their goal.
House of Representatives Financial Services Committee Chairman Barney Frank unveiled a plan Tuesday that calls for $20 billion in public funds to bail out mortgage borrowers through the Federal Housing Administration.
Under the plan, the FHA would be able to buy up and refinance $300 billion worth of subprime mortgages that are underwater and/or delinquent. The proposal will also provide $10 billion in grants and loans to states for buying and fixing up foreclosed properties.
Frank insists his legislation is not a bailout of mortgage lenders, because lenders will have to take their losses on the loans that the FHA buys or refinances.
Frank told reporters at a briefing last week that if the current lenders or mortgage holders agree to writedowns that are sufficient to meet the requirements of the program and to make the new loans affordable, the FHA lender will then pay off the discounted existing mortgages.
The key words in that bit of waffle are: 'requirements of the program' and 'affordable.'
Under the proposal, mortgages accepted by the FHA must have an LTV of no more than 90 percent. If the LTV is above that, the old mortgage lender will have to take a loss. For example: a borrower owes $110,000 on a property worth $100,000. The maximum FHA loan amount would be $90,000. This includes closing costs (approximately five percent) and HUD insurance (another five percent.) After all is said and done, the old mortgage lender would get about $81,000.
Although it is costly for mortgage lenders to foreclose, they do have a reputation for greed. It is rather unlikely that existing lenders will embrace this proposal with open arms. After all, they are the ones who will have to take the loss upfront.
Frank's legislation is being backed by Senator Christopher Dodd, chairman of the Senate Banking Committee. Democratic presidential hopefuls Barack Obama and Hillary Clinton have also publicly offered support for the proposal.
Not everyone has boarded the bandwagon though. Republicans have not yet lent their support, which will be necessary in order for this bill to pass the Senate. Opposition may also come from the White House. President Bush stated recently that he opposes using taxpayer funds to bailout anyone and believes the stimulus plan should be given time to work.
A broader role for the FHA means more risk for taxpayers. The FHA is underpricing for the risk they are taking on already. If too many FHA mortgages go south, taxpayers will end up flipping the bill.
According to Frank's website, comments and suggestions are welcome. Feel free to let Frank know what you think about his proposal.
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