WASHINGTON -- When House Speaker Nancy Pelosi received a letter from the White House opposing an element they believed was contained in Representative Barney Frank's (D-Mass.) draft housing proposal, Frank swiftly responded with a letter of his own, denying the White House's contention.
The White House letter sent to Pelosi on April 9 was written by Keith Hennessey, assistant to the president for economic policy and the director of the National Economic Council, and by Karl Zinmeister, assistant to the president for domestic policy. Frank's response of April 10 keyed on one issue the White House opposed: allowing lenders or servicers to sell bad loans to taxpayers through an auction process, clearinghouse, or other wholesale mechanism.
"I agree entirely, and for that reason the discussion draft considered by the Financial Services Committee in today's hearing does not include such a mechanism," wrote Frank in his letter to the White House. "There have been several proposals for outright purchase of loans by the government, some of which could give rise to the kinds of concerns you express. The authority provided in Title II of our proposal, however, would not result in government purchase of loans, but instead would provide authority to permit a streamlined 'wholesale' process to produce refinancing loans that meet FHA insurance standards. Loans under this facility, as with the 'retail,' loan-by-loan facility in Title I, would have to be reunderwritten fully with complete documentation of income and appraised property value."
The Title II wholesale authority is intended as a backstop, Frank noted, and would only be deployed if the proposed Oversight Board, comprising the Treasury, HUD and the Federal Reserve Board, determines that such a facility is feasible and would provide an efficient and effective mechanism to reduce foreclosure by refinancing existing loans into performing FHA loans. Refinancing borrowers into loans they can't pay would not reduce foreclosure, he maintained, but only shift who is doing the foreclosing.
Frank expressed his agreement with the administration's recognition of the need to expand the reach of the FHA Secure program, saying that he'd "been disappointed at the result of the program to date, but I believe that we share the goal of finding ways to avoid unnecessary foreclosures where a viable FHA loan can be made through current holders accepting a write-down or otherwise. I believe we also agree on the need for broad FHA and GSE reforms, which I continue to seek."
A bulk refinancing mechanism has the potential to facilitate delivery of larger numbers of refinanced loans, and the proposal gives the responsible agencies ample authority to ensure that such a mechanism is not used unless it can produce good loans.