Kroszner Urges FHA Reform, Flexibility

The Federal Housing Administration should be modernized and given the flexibility to insure refinancing products for at-risk borrowers, Federal Reserve Board governor Randall S. Kroszner testified to Congress yesterday.

“FHA modernization and [government-sponsored enterprise] reform are needed to address the ongoing shortcomings of current mortgage-oriented government initiatives,” Kroszner said, according to prepared text of the testimony released by the Fed. “In addition, the GSEs should be strongly encouraged to raise additional capital so that they can fulfill the expanded role that the Congress has recently extended to them.”

Further, he said Congress should “carefully evaluate” the need for additional action to stem “preventable foreclosures.” While “lenders and servicers have scaled up their efforts and have adopted a wider variety of loss-mitigation techniques, more can, and should, be done,” he said.

With many troubled borrowers owning properties worth less than the principal amounts remaining on their mortgages, “lenders and servicers should give greater consideration to the use of principal reductions as one of the loan modification options in their tool kit,” Kroszner said. “Principal write-downs would be facilitated by providing the FHA the flexibility to insure a broad range of refinancing products for a larger number of at-risk borrowers, including products that offer borrowers an affordable, restructured mortgage if their lender voluntarily agrees to write-down the principal amount of the borrower’s mortgage.”

“The voluntary nature of the program assures that only borrowers who the servicer or lender believes cannot successfully carry their current mortgage contract would be considered for such a program,” he added. “If the Congress decides to move down this road, it should carefully consider the steps that should be taken to mitigate moral hazard, avoid adverse selection, and ensure that the financial interests of the taxpayer are adequately safeguarded.”

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