With home foreclosures expected to increase in 2008 as the second wave of variable interest rate mortgages reset, an influential member of Congress is expected to introduce legislation that would enable the Federal Housing Administration to buy at-risk loans, enabling them to be refinanced and preventing homeowners from being foreclosed upon, The Financial Times reported Wednesday.

U.S. Congressman Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, is floating a $15 billion initiative that would authorize the FHA to buy as many as 1 million at-risk mortgages, The FT reported. Some loans, such as those for investment properties and vacation homes, would not be eligible for the program.

The overlooked FHA

Overlooked during the "Roaring 1990s" economic expansion and this decade's housing boom, the Federal Housing Administration is a Depression-era agency that insures loans made to borrowers with poor credit.

If introduced, Frank's proposal would be one of several bills circulating in Congress designed to prevent the current housing slump -- the nation's most severe housing slump in more than 20 years -- from worsening. To-date, the Bush Administration has steered away from government purchases of classes of loans and favored private initiatives aimed at restructuring them, along with public-based monetary policies designed to improve banks' cash flow.

Critics: rewards bad choices

Among other criticisms, critics charge that the private sector banks should be able to withstand the large amount of foreclosures and defaults brought on by the housing slump. Rep. Frank disagrees. "You can't put an end to the economic problems without reducing foreclosures," Rep. Frank said, The Wall Street Journal reported Wednesday. (Subscription required.)

Critics also say an FHA program would amount, in many cases, to rewarding people who made bad choices, and/or encourage reckless financial behavior. Economist Steve Affinito disagrees, saying the latter "is a viscous double-standard of the very worst sort."

"If the critics are concerned about the government rewarding people who made bad choices, then why did the [U.S.] Federal Reserve establish the Term Auction Facility to provide short-term liquidity, which are loans, to banks?" Affinito said. "The banks made bad choices. If the government is against helping entities after they made bad choices, the government should let the banks fail. The answer is obvious enough. The government is not against it, and there are positives associated with intervention, so the FHA plan is a legitimate tool."

Affinito added that there's solid U.S. Government case precedent for assistance, both to the banking system and to homeowners. In the 1930s, the government created the Home Owners' Loan Corp. to help borrowers avoid foreclosure, he said. The post-World War II GI bill for U.S. military service veterans also guaranteed veterans' first-home mortgages, "which constituted a form of assistance," Affinito said. The GI bills' insurance also enabled veterans to secure mortgages at a lower interest rate.

Economists and analysts estimate that by the end of 2009 up to 1.3-1.5 million home mortgage holders may need some form of assistance to avoid foreclosure.

Congress weighing other ideas

Further, along with the Rep. Franks' FHA proposal, other ideas also are being floated in Congress. The federal Office of Thrift Supervision, a division of the U.S. Treasury, is working on a plan to help borrowers who owe more on their mortgages than their homes are worth, The Journal reported Wednesday. (Subscription required.) In addition, lawmakers are said to be working on a separate $20 billion bill for grants and loans to state and local government to help to buy up foreclosed and abandoned homes.

Still, Affinito admits that Rep. Frank and other Democrats will need to compromise and find common ground with those Republicans receptive to the FHA plan; President Bush is also likely to at least voice criticism of the proposal, if not threaten an outright veto, on unnecessary government intervention grounds, Affinito added.

Even so, Rep. Frank is not deterred. "It was the lack of government intervention that got us here," Rep. Frank said, The Journal reported Wednesday. (Subscription required.)