U.S. Rep. Barney Frank, D-Massachusetts and Chairman of the House Financial Services Committee, Thursday introduced legislation to enable the Federal Housing Administration to insure and guarantee mortgages that have been written down banks and other mortgage holders, Rep. Frank announced in a statement.

Rep. Frank's proposal would permit the FHA to provide up to $300 billion in loan guarantees which could potentially result in the refinance of 1-2 million at-risk mortgages, preventing foreclosures, "protecting neighborhoods and help stabilize the housing market."

Mortgage rate re-sets

Estimates vary, but the number of home foreclosures is expected to continue to rise through at least Q3 2008, probably through 2008. Analysts say more than 1.5 million foreclosures could occur this year, given certain economic conditions, as the nation experiences the "second-wave' of co-called mortgage re-sets -- adjustable and teaser rates that will be reset to higher rates to reflect the higher interest rate conditions produced by the credit crunch.

Under Rep. Frank's plan, in exchange for accepting a substantial write-down of principal, banks/lenders would receive payment from a new FHA loan "that the borrow could reasonably pay."

Rep. Frank's proposal would also authorize up to $10 billion in loans and grants to buy and rehabilitate vacant land, including foreclosed/abandoned homes.

Other proposals

Frank's proposal is not the only mortgage assistance plan floating around Capitol Hill. U.S. Senator Christopher Dodd, D-Connecticut and the Office of Thrift Supervision have introduced plans that would prevent avoidable foreclosure and/or enable lower-payment refinancings, Reuters reported Thursday.

The U.S. Federal Reserve has also called for substantial changes to at-risk mortgages, but it has not advocated the use of public funds. Earlier this year, Federal Reserve Chairman Ben Bernanke said banks/lenders should consider reducing the principal of at-risk loans, and also advocated giving the FHA broader authority to set underwriting standards and risk premiums.

Bush Administration's programs

Further, to-date the Bush Administration has taken a more-measured approached to the nation's housing slump. The administration's HOPE NOW program encourages banks/lenders to meet with at-risk borrowers with the hope the two sides can reach agreement on a repayment plan, and on Thursday U.S. Treasury Secretary Henry Paulson proposed a broad series of reforms aimed at strengthening oversight of financial institutions.

Economic Analysis: Rep. Frank's proposal is the most specific statement to-date by a leading member of Congress calling for the use of federal funds to restore the housing sector's health. The proposal is substantive and speaks to the heart of the at-risk mortgage issue -- these mortgages will either have to be partially forgiven by banks or refinanced by some entity -- but Frank, if hasn't already, should seek Congressional Democratic Leadership support, and Republican support, if possible, for his plan. That's because, a consultation-oriented, widely-backed plan has the best chance for Congressional passage.