Frank's Mortgage Disaster Near

Barney Frank's misguided attempt to help troubled borrowers took one more step toward reality.

The House Financial Services Committee today passed H.R. 1852, the “Expanding American Homeownership Act of 2007” introduced by Representative Maxine Waters, Chairwoman of the Subcommittee on Housing and Community Opportunity, and Barney Frank, Chairman of the Financial Services Committee. The bill would revitalize the Federal Housing Administration (FHA) to restore its historical role in ensuring critically needed mortgage loans for low and middle income families by authorizing zero down payment loans, directing the Department of Housing and Urban Development (HUD) to serve higher risk borrowers who would otherwise turn to predatory and high priced mortgage loan alternatives, and by raising loan limits so that FHA can serve high cost housing markets. The bill now awaits a vote by the full House of Representatives.

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Increasing loan limits in high cost areas of the country like California, New York, and Massachusetts, where FHA has been driven from the market, forcing many borrowers to turn to high-cost financing and other non-traditional loan products.

· Authorizing zero down and lower down payment FHA loans for homebuyers who could not otherwise make the down payment required under current FHA rules, to make FHA more consistent with other private sector loan products.

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Directing FHA to underwrite to borrowers with higher credit risk than FHA currently serves that are still creditworthy to take out a mortgage loan, but are otherwise now being driven into the subprime loan market, with much higher mortgage rates.

· Permanently eliminating the current statutory volume cap on FHA reverse mortgage loans to permit this program to meet the growing needs of home equity rich, cash poor seniors citizens that need help paying bills or needed home costs, while capping the fees that loan originators can charge senior citizens

· Reinvesting increased FHA profits created by the bill in housing counseling and affordable housing fund activities

Now, first let's review what I like in this bill. I like the cap being removed from reverse mortgages. I hate caps. They make the market out of whack and removing any is fine by me. What I dislike is everything else.

The numbers aren't firm, however what Frank wants to do is loosen the restrictions on FHA rather significantly. Not only would frank extend the debt to income limits (the word maybe as high as 55% even though it is only 42% now), but he will increase the limits on loan amounts, and decrease the limits on down payments. Of course, it should be noted again that the main reason that FHA is not facing the crises that other niches of the markets face is because they have strict debt to income limits. By increasing them, all Frank will do is create the same problems in FHA that there were to create the crisis.

Furthermore, FHA was created primarily to serve the poor and the middle class. How exactly is increasing limits far beyond their current of over 400k going to help those folks. All it would do is make FHA take on loans at higher values. This will also put FHA at greater risk. Finally, FHA requires only 3% down payment, and with down payment assistance, evem that can be taken care of. All that lowerin the down payment caps even more will do is again increase the risk that FHA is taking on. How about this next line?

Directing FHA to underwrite to borrowers with higher credit risk than FHA currently serves that are still creditworthy to take out a mortgage loan, but are otherwise now being driven into the subprime loan market, with much higher mortgage rates.

If Frank knew anything about the current mortgage market, he would know full well that sub prime is nearly non existent. Furthermore, this statement is so nebulous and vague that it will likely mean just about anything. The bottom line is that Frank has just given FHA the green light to become more aggressive than they were ever meant to be or they should be. Frank, has decided that FHA should face the responsibility of helping the same troubled borrowers that caused the crisis to begin with.

Of course, if that wasn't enough, Frank also wants to make sure that the borrower is inundated with even more paperwork and red tape.

The bill also adds a number of homebuyer protections not included in last year’s bill for families taking out riskier zero down payment loans, and for borrowers who represent a higher credit risk. Specifically, the bill gives HUD authority to require pre-purchase counseling for riskier borrowers, requires a number of disclosures spelling out the costs and risks of zero down and lower down payment loans, and requires borrowers to receive notice of availability of counseling in the event they fall behind in their loan payments.

The concept of home buyer counseling is one I would rather not spend anytime discussing. Let's just say all it has done anywhere it has been tried is plummet real estate sales. As for the so called disclosures, that means even more paperwork will be created to be signed at closing.

Frank is under the faulty impression that troubled borrowers will be saved if only they can qualify for loans the market would never allow them to qualify for in the first place. The reality is that most of these folks were and still are simply too irresponsible to hold onto these mortgages. At least right now, most are being held by private companies. If Frank has his way, the tax payer is ultimately responsible because they would fund FHA as soon is it is bankrupted taking on loans they shouldn't have.