A proposed bill that would allow the Federal Housing Administration to refinance risky loans by requiring voluntary principal write-downs is the mortgage industry’s last chance to solve the mortgage crisis on its own, a key lawmaker said Monday. In remarks made at the Mortgage Bankers Association’s Secondary Market conference in Boston, House of Representatives Financial Services Committee Chairman Barney Frank (D-MA) said that his proposal to allow the government to guarantee up to $300 billion in refinancing activity tied to distressed mortgages was the last stop before much tougher legislation. “If this approach … doesn’t make much difference, I must tell you that much tougher, more intrusive regulation will be on the way,” he said. Characterizing his proposal — H.R. 5830, the FHA Housing and Homeowner Retention Act — as a “cooperative approach” to solving the housing mess, Frank said strong-arming both lenders and servicers would become “politically irresistible” should the bill pass and servicers fail to push troubled borrowers the FHA’s way. “This is our last chance to make things work,” he told an audience of industry professionals in what could best be characterized as a tense, awkward general session. Many attendees peppered Frank with questions, and the Massachusetts Democrat alternated between defensive and reflective over the housing proposals now circulating through Congress. “Isn’t the Fed to blame?” asked one attendee. “If they hadn’t made money so cheap, a lot of this never would have happened.” “I reject that,” Frank replied. “It’s like saying ‘stop me before I lend again.'” Via Reuters’ Al Yoon, some additional insight:

Many Wall Street analysts doubt that the plan [Frank’s FHA proposal] will have large-scale success because of its voluntary nature. Servicers would have to forfeit portions of their streams of income, which they would likely recover in event of default since they are typically the first to get paid after foreclosure. Still, servicers that must advance payments to investors in the event of borrower default are increasingly stressed as they are thinly capitalized, analysts at Citigroup Inc. said in a research note last week. These servicers may be better off participating in such a program, they said.

Questions on conforming jumbos Seperately, Frank said that he “was disappointed” in recent economic stimulus legislation that raised conforming and FHA lending limits temporarily in key local markets. So-called jumbo conforming loans have yet to begin flowing into the secondary market, while the FHA has begun pushing some of the higher balance product out to investors. Frank said his Committee will hold a hearing on May 21 to figure out “why we haven’t gotten more bang for our buck” with the boosted conforming and FHA lending limits. “We need to try to unstick that market,” he said. “There is a chain of people blaming each other, and we’re going to call everybody in there into the hearing and find out why.” In mid-April, both Fannie Mae (FNM) and Freddie Mac (FRE) announced pricing commitments designed to alleviate uncertainty among investors. It’s unclear as of yet whether these commitments have led to any uptick in activity, but it’s clear that so far the legislation signed by President Bush in February has yet to provide the lift that many originally expected.