BARNEY FRANK
Eliminate penalties

U.S. Rep. Barney Frank has asked the chairman of the Federal Reserve to explain his reasoning for suggesting a change to the makeup of Fannie Mae’s and Freddie Mac’s loan portfolios.

Frank, who is pushing loan servicers to ease penalties imposed on some troubled borrowers who pay off their subprime mortgages early so they can refinance into less risky loans, wants Fannie Mae and Freddie Mac to pick up some of the loans.

Fannie Mae and Freddie Mac, government-sponsored enterprises, purchase loans from lenders but there is currently a cap on how many loans they can buy.

In a speech before the New England Housing Network Conference in Needham last week, Frank said he wants loan servicers to eliminate prepayment penalties so subprime borrowers can refinance their loans and avoid foreclosure.

Frank, D-Mass., said some of those new loans would have to be purchased by Freddie Mac and Fannie Mae. But he noted that the Bush administration and Federal Reserve Chairman Ben Bernanke have resisted lifting the portfolio cap to protect the “safety and soundness” of Freddie Mac and Fannie Mae.

According to Frank, Bernanke recently indicated that if Frank and other Democratic leaders want Freddie Mac and Fannie Mae to add those loans, the two entities could sell some of their non-subprime mortgages and replace them with subprime mortgages.

“It’s extraordinary that he said that,” said Frank, who chairs the House Financial Services Committee.

Frank sent a letter to Bernanke on Sept. 7 seeking an explanation. In said, in part, “You appear to be saying here that it would be acceptable for the GSEs to do more in the riskiest subprime market not by increasing the total portfolio, but by selling off easily placed non-subprime mortgages and replacing them in the portfolio with riskier paper.

“How is your proposal to substitute the newer sales for conventional portfolio loans in any way consistent with your assertion that the reason for the caps is safety and soundness? Clearly, if safety and soundness was the concern that led you to object to any increase in portfolio, you would hardly be supportive of substituting within the overall portfolio cap riskier mortgages for those that are “easily placed” in the market, presumably because they are of a higher credit quality.”

Typical prepayment penalties can be six months of interest on 80 percent of a loan’s principal, which translates into thousands of dollars, according to the Center for Responsible Lending, a nonprofit policy and research group.

An estimated 65 percent of subprime mortgages carry a prepayment penalty, according to the Inside Mortgage Finance database. But the Center for Responsible Lending believes that’s a conservative estimate because the number reflects only loans that have been packaged and resold as mortgage-backed securities.

Participants at last week’s conference, which included regulators and housing advocates, also learned about efforts to pass a National Housing Trust Fund. The fund, which would be modeled after existing state and local housing trust funds, would provide money to communities to build or preserve housing for low-income families. Supporters estimate that the fund would fund 1.5 million affordable homes over a decade. At least 75 percent of the funds would be used for housing for people earning less than 30 percent of an area’s median income.

Frank said two challenges to creating a trust fund are finding an ongoing source of money so it is not subject to appropriations and so it doesn’t compete with other housing programs for funding.

The House Financial Services Committee voted to support a bill in late July to establish a National Housing Trust Fund. The committee approved legislation that includes a provision to reserve $500 million a year for the trust fund. Another source of funds is provided in the Federal Housing Administration modernization bill, which enables the expansion of the reverse mortgage program for seniors. The program’s expansion could generate another $300 million for the trust fund.

“If we get this up and running Â… there is no question in my mind it will be so popular it will be easy to add to it,” said Frank.

‘Difficult’ Years

The conference also included sessions about legislation to reform the federal Section 8 rental voucher program and prevent foreclosures and predatory lending.

The Section 8 Voucher Reform Act was passed by the House with strong bipartisan support in July. The legislation seeks to change funding policy and authorize 20,000 new vouchers every year. It also seeks to ensure that voucher tenants are not displaced, and changes the way rents are calculated while continuing the cap on residents’ rents at 30 percent of adjusted income.

“The last four or five years have been extremely difficult ones for the Section 8 voucher program,” said Barbara Sard, housing policy director for the Center on Budget and Policy Priorities.

Advocates estimate that changes in the voucher program funding formula, which have occurred almost annually in recent years, have resulted in the loss of 150,000 rental vouchers since the beginning of 2004.

Sen. Christopher Dodd, D-Conn. and chairman of the Senate Banking Committee, is expected to file a Senate version of the Section 8 Voucher Reform Act by the end of the month, according to Sard.

But Sard said while the House vote on the legislation, which was 333-83 in favor, is “very veto-proof,” getting the Senate to approve it will be challenging.

“Even if we get 60 votes to avoid a filibuster, it would still take floor time,” she said.

Sard said it’s not certain that the Congress would allow floor time – or debate – on a “poor people’s housing bill.”

“Any senator can hold it up,” she said. The legislation would need unanimous consent in Senate to avoid such a scenario, she explained.