Washington Report: FHA to Handle Foreclosure Crisis

All the major players -- from the heads of the key housing committees to the presidential contenders -- now agree on one central point: There will be no new agency created to deal with the national foreclosure crisis. Instead, all the work will be loaded onto the shoulders of the Federal Housing Administration -- the FHA.

Earlier this year, there were moves in Congress to revive some version of the Depression-era Home Owners Loan Corporation, which bought up hundreds of thousands of delinquent mortgages and replaced them with more affordable government-backed loans. The agency, which ultimately turned a small profit for the U.S. Treasury, closed its doors in the early 1950s.

But now top Democrats on both sides of Capitol Hill, along with presumptive Republican presidential nominee Senator John McCain and Democratic contenders Hillary Clinton and Barack Obama, all agree: Hand the ball this time around to the FHA.

House financial services chairman Barney Frank is putting together legislation that would authorize up to $300 billion in special funds to cover potential losses on FHA financings of loans to people with the most serious delinquency situations -- homeowners heading into foreclosure.

Under Frank's plan, FHA would acquire distressed mortgages -- sometimes in bulk packages -- at discounted prices from bond investors and lenders. The sellers would have to agree to substantial writedowns of principal balances.

Senate banking chairman Chris Dodd is pushing a broadly similar concept, and now even Republican candidate McCain -- who says he is opposed to bailouts -- has come out in favor of an FHA-directed refinancing program.

But there are some potentially tough questions that come with this consensus approach.

Number one: Will investors agree to participate in large enough numbers to make a dent in the foreclosure problem? One industry consultant who works with loan servicers and bond investors told Realty Times last week that if the required writedowns are too large, many of his clients would "take their chances" and stay with the voluntary Hope Now Alliance plan, which emphasizes five year rate freezes and various forms of loan modifications as foreclosure alternatives.

A second potential fly in the ointment: Is the FHA -- which is already loaded down with new financing volume and has seen its market share explode from 3 percent to more than 20 percent in six months - staffed up and ready to handle even more complicated, high-risk refinancings?

Congress will need to come up with answers to both questions before putting the wraps on its final relief bill next month.