Battle over FHA Reform Takes Shape on Capitol Hill

As the House Financial Services Committee begins work this week on a $300 billion proposal that would expand the Federal Housing Administration’s authority to purchase and refinance troubled mortgages, battle lines are emerging between White House leaders and Congressional Democrats over the proposal.

Committee Chairman Barney Frank (D-MA) has pushed for the proposal, and reiterated his stance Thursday, suggesting that should lawmakers fail to pass new housing legislation, the U.S. recession will be worse than most expect.

His warnings came on the heels of a White House letter earlier in the week from Deputy Secretary of Housing and Urban Development Roy A. Bernardi that called the proposed bill a bailout for irresponsible borrowers. Numerous media outlets reported on the letter Friday, in which Bernardi conveyed the Bush administration’s stance that the FHA’s current scope is more than enough to address the needs of a troubled housing market.

The Washington Post carried Frank’s reaction to the letter:

[Frank] had hoped that the White House would support the plan. The administration has twice expanded FHA’s role in addressing the housing crisis and recently announced that it would urge lenders to forgive some debt. But yesterday’s letter, Frank said, initially struck him as a “veto threat.”

“I thought we were moving together. Now I don’t know where we are,” Frank said.

Part of Frank’s confusion is likely rooted in the fact that the current administration’s hard line against the bill isn’t broadly supported by key Republicans in Congress or at the Treasury, according to sources that spoke with Housing Wire.

In an interview with Reuters Thursday, U.S. Treasury Secretary Henry Paulson suggested that the administration was behind the bill, saying “We are behind the objectives. We like some parts of it better than others and we have not issued a veto threat.”

That tone didn’t sit well with deputy White House spokesman Tony Fratto, who said Friday that Paulson’s remarks weren’t indicative of the administration’s stance towards the proposal.

Rep. Spencer Bacchus (R-AL) also reiterated party opposition to the FHA reform bill in his opening remarks Thursday as the House panel began debate on the measure.

“I am unable to support the Chairman’s new legislation, because I believe it will unfairly benefit a few homeowners at the expense of millions of careful borrowers and renters,” he said. “In so doing, it will require American taxpayers to assume risks incurred imprudently by mortgage lenders and now-over-extended borrowers during the run-up in housing prices earlier this decade.”

The House panel did pass two other housing measures earlier this week. A panel vote on the FHA reform proposal is expected next week.