Bush Administration to Propose Expanding the Number of FHA Secured Loans

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Bush Administration to Propose Expanding the Number of FHA Secured Loans

The debate rages on about the role the government will play in the mortgage crisis. It appears the Bush administration is conceding some ground to the Democrats who have been making more costly proposals in response to the crisis.

Bush's plan would help roughly 100,000 homeowners avoid foreclosure by lowering their mortgage. The proposal would allow the FHA to insure the new loan in order to get the banks to "voluntarily" lower the homeowner's mortgage. This proposal would add to the 400,000 homeowners already expected to hold FHA secured loans by the end of the year.

Essentially, the plan is to shift the risk from the bank to the government at a substantially lower cost. The bank would still be able to recoup their losses if the borrower defaults after the revised loan has taken effect.

Democrats are expected to object the proposal as insufficient. Their own proposals would help 1 million homeowners at an estimated cost of $300 to $400 billion.

Here's a basic outline of the Bush administration's plan from Wall Street Journal:

The expansion would allow the FHA to insure a new mortgage if a lender voluntarily writes down the mortgage principal to a maximum of either 90% or 97% of the new value, depending on the borrower's risk profile. If a loan and home was originally valued at $110,000, for example, and fell to $100,000, lenders could reduce the principal to either $97,000 or $90,000 to qualify for FHA insurance.

House Republicans introduced a document outlining eight principles for dealing with with the situation.

House Republicans released a set of eight principles they said should guide legislation dealing with the housing crisis. The principles say the market "needs a jump start, not a bail out," the document said. It called for lower taxes for middle-class families and "reform and transparency" in the housing market. Anyone who receives government assistance "should have to make a financial sacrifice and have a stake in the outcome," the Republicans said.

"We must also work to help the innocent victims of the housing crisis, without providing a taxpayer-funded bailout to speculators, scam artists, or recklessly irresponsible borrowers," said House Minority Leader John Boehner (R., Ohio).

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