Foreclosure-haunted homeowners may find they have an FHA-guaranteed pathway to relief under a multibillion-dollar home loan bailout plan now being hammered out between the House and the Senate.

The Senate Banking Committee on Tuesday was promoting a tweaked version of a House bill passed earlier this month, one that eliminates direct taxpayer funding, removing a potential reason for a presidential veto.

But observers were quick to point out potential pitfalls and costs of even the redrafted proposal: the complexity of getting investors who bought mortgages in large blocks to acquiesce to the changes and the trickle-down fee costs likely to be borne by borrowers not being helped by the proposal.

Under the Senate legislation, homeowners whose homes are worth less than the loan they are paying and who are headed for foreclosure would be able to free themselves from their original lenders and refinance with Federal Housing Administration loans on better terms. The program is voluntary for lenders.

The new loans would be guaranteed by the FHA under an expanded program that Congressional staffers say could help as many as 500,000 people to refinance into more affordable loans.

Both versions include other important elements besides the mortgage bailout, including rules to modernize the FHA and tax incentives to stimulate the housing market.

The Bush administration, which up to now has said it would opposed legislation to rescue troubled homeowners, indicated willingness to consider the Senate deal because lawmakers had found a way to eliminate a direct cost to taxpayers.

Sen. Chris Dodd, the Connecticut Democrat who chairs the Banking, Housing and Urban Affairs Committee, said his bill included several changes, including shortening the life of the foreclosure assistance plan to three years, which would keep the cost from expanding beyond a half-billion dollars.

The money would come from a new affordable housing fund created by collecting roughly a half-penny on every dollar of mortgages bought by Fannie Mae or Freddie Mac.

The trick is that the existing lender would have to be willing to accept 85 percent of the home’s current appraised value as payment in full. That would be enough for the FHA to cash out the lender by issuing the new loan.

Frank Fontanetta, president of Sentinel Mortgage Co. of Sarasota, is an FHA loan originator, so his company may stand to gain by making the government-guaranteed loans that are used to refinance the existing underwater loans. Even so, he sees problems.

“I think the intentions are great, but I think it is going to be an extremely difficult process,” he said.

“Probably the biggest challenge is going to be not only getting lender approval, but also the approval of the investors who bought the paper,” Fontanetta said. “Half the time these mortgages were sold in big blocks. How do you pull one mortgage out of the block?”

The Mortgage Bankers Association has been cheerleading the legislation. On May 8, the group applauded the House version. On Tuesday, the lobbying group for the nation’s primary lenders said it “applauds” the Senate committee’s passage.

“It is another tool for lenders to help keep borrowers in their homes,” said spokesman John Mecham. “No, it is not mandatory.”

In the MBA’s latest statement, MBA Chairman Kieran Quinn reinforced that point: “We want to ensure there are appropriate safeguards to help deserving borrowers while keeping the program voluntary for lenders.”

One reason the MBA is on board is that both versions of the bill would give the lenders the option but not the obligation of dumping the existing loan for 85 percent of the current appraised value.

Thus, a bank would simply have a new option to weigh in considering underwater loans within its portfolio. If executives were figuring on taking a property back and eventually selling it for 75 percent of current appraised value, getting an immediate 85 percent with government backing would clearly be attractive.

“I would take the guarantee of the government any day,” said Tramm Hudson, a Sarasota banking executive now consulting with banks to help them through the difficult economic environment.

Even if lender participation starts out voluntary, Hudson foresees the possibility of later rulings making their participation mandatory. He also questions whether the Congress should be assisting the lenders and their borrowers from their own bad decisions.

Hudson, who facilitated the December sale of Bradenton’s Coast Bank to First Banks of St. Louis, said that in many cases, many banks are already addressing the issues that the bailout is aimed at.

“I can tell you from my Coast Bank experience, we were cutting deals with borrowers to get them back into a performing status,” he said.

While the Senate bill is being promoted as having no cost to the taxpayer, Hudson points out that long-term it will drive the cost of credit up.

Information from the New York Times was used in this report.

Source : http://www.heraldtribune.com/article/20080521/REALESTATE/805210501/1668