“Since they (Republicans) don’t know how to create jobs, they’ve changed the topic to their radical approach to the budget,” said U.S. Sen. Barbara Mikulski (D-Maryland). “And it is radical. They’ve cut $1 billion at the National Institutes of Health, $1 billion dollars from Head Start, $50 million from prenatal care — the changed the topic from jobs since they didn’t know how to do it.

“Then they said, ‘Oh, we are going to fight to bring down the debt and the deficit.’ And that hasn’t worked out because, to their surprise, we had specific, immediate, achievable ways to become a more frugal government. Since they lost that fight, they want to change the topic again so that all we are talking about is a radical, ideological agenda in riders. … Let’s get back to what we should be talking about: How to avoid a shutdown.”

The numerous policy riders attached to the bill, Mikulski said, can be voted on another day, and do not have to be a part of a budget discussion.

Perhaps the most contentious of the riders attached by the GOP is a complete ban of all federal funding for Planned Parenthood.

“This is not about abortion,” said U.S. Sen. Kirsten Gillibrand (D-New York). “Republicans need to wake up. Since the Hyde Amendment of the last 30 years, federal money does not pay for abortions in this country. What they are cutting in this bill is the safety-net for poor, at-risk women for pre-cancer screenings, for prenatal care, for early detection of STDs — for all the types of safety-nets that keep our families safe.

“This is unacceptable and we will draw the line in the Senate.”

The frustration being voiced by the women of the Senate was also present in a prepared statement issued Friday by U.S. Rep. Dave Loebsack, a Democrat who represents Iowa’s 2nd District.

“As a government shutdown looms, politicians in Washington are still wrapped up in political Russian roulette where the clear loser is Iowans,” Loebsack said. “Instead of shutting down the government in an effort to restrict women’s access to health care, we need to think about our military families who are worried about how they are going to put food on the table, even while their loved ones are defending our nation overseas.

“A government shutdown can still be averted, but the grandstanding and misplaced debates about social policy must be put aside. We must work together toward a compromise that addresses the needs of our constituents, and keeps our economic recovery on track. Time is running short — I call on Congress and the President to put our constituents ahead of politics.”

In a Facebook posting Friday, Planned Parenthood of the Heartland called the situation “an outrage” that “hurts women,” and noted that more than 54,000 women in Iowa and Nebraska would lose access to screenings and preventative health care if the policy rider barring federal money for Planned Parenthood remains intact.

Although the policy rider in connection with Planned Parenthood has been one of the most discussed and contentious items attached to the budget bill, it is far from the only attachment to H.R. 1, the continuing resolution passed by the U.S. House on Feb. 19. Other riders have included a prohibition of funding for the Biomass Crop Assistance Program, limitations on the FDA’s ability to transfer funds, stalling a transfer from the Federal Reserve for the creation of the new Bureau of Consumer Financial Protection and development of a government-sponsored “consumer products complaints database,” prohibits funds for the U.S. Department of Education for regulations on Gainful Employment, stalls funding for several environmental and conservations programs including the Conservation Stewardship Program and the Watershed Protection and Flood Prevention Act, prohibits funding for the implementation of health care reform provisions, halts funding for capital advances or rental assistance contracts for HUD Housing for the Elderly projects and bars the transfer of detainees from Guantanamo Bay.

Watch the press conference held by the Senate women:

The lawsuit was filed on behalf of three surviving spouses of reverse-mortgage borrowers, who allege that HUD “abandoned long-established federal rules and violated protections for surviving spouses, with the result that the three individuals are now facing imminent foreclosure and eviction from their homes,” according to an AARP press statement. The elderly plaintiffs, from Indiana, New York and Maryland, are being represented by the AARP Foundation Litigation and the D.C.-based law firm Mehri & Skalet, PLLC.

At the center of the case is the principle of a reverse mortgage – a loan that allows homeowners over 62 to convert their home equity into cash, rather than making monthly mortgage payments. In the reverse mortgage, the loan only becomes due and payable if the homeowner dies, moves or decides to sell the home. The plaintiffs’ lawyers are claiming HUD had a policy in place that protected spouses but in 2008 the department changed its interpretation of that policy and began enforcing a rule that spouses who wanted to retain their homes were required to repay the full balance, even if the balance was more than what the home was worth.

From AARP:

The case will have broad national implications, because the outcome will determine whether spouses will be able to stay in homes that are now “underwater” as a result of the housing downturn, a possibility that reverse mortgage borrowers have always paid insurance premiums to protect against.

HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir – including a surviving spouse who was not named on the mortgage – must pay the full mortgage balance to keep the home, even it if exceeds the value of the property. This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums.

… One protection is that no borrower or his heirs can be liable for more than the value of the property. The lawsuit notes that HUD’s Handbook, in effect since 1994, as well as other information published by HUD on its website and elsewhere, affirmed this policy. Then, in December, 2008, HUD abandoned that interpretation and stated for the first time that spouses or heirs who wanted to retain the home were required to repay the full balance, even if it exceeded the property’s current value. Strangely, HUD’s current rule is that a stranger can purchase the property for its current appraised value, but a surviving spouse cannot.

The three plaintiffs, all of modest means, were adversely affected by HUD’s illegal actions. Under HUD’s rules, they do not qualify as “homeowners” because they were not listed on the original reverse mortgage documents with their spouses. And they will suffer “substantial hardship” if forced to repay the original higher mortgage cost in order to retain their home, the lawsuit states.

About 23 percent of all mortgaged homes are underwater, according to housing data firm CoreLogic.

The programs — the Home Affordable Modification Program, HUD’s Neighborhood Stabilization Program, the Emergency Homeowner Relief Fund (passed under the Dodd-Frank Act) and the FHA’s Short Refinancing Program — will be the subject of a March 2 hearing by the Insurance, Housing and community Opportunity Subcommittee. Bill mark-up is expected to take place the following day, March 3.

“In an era of record-breaking deficits, it’s time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners,” said U.S. Rep. Spencer Bachus (R-Ala.), who leads House Financial Services.

“These programs may have been well-intentioned, but they are not working and, in reality, are making things worse.”

The call to end the programs, which are considered key Obama administration projects to combat the nation’s foreclosure crisis, was joined by U.S. Rep. Judy Biggert (R-Ill.), who leads the Insurance and Housing Subcommittee.

“We need to break down barriers that have delayed the housing recovery, including expensive and ineffective government programs that have failed to help homeowners. Unfortunately, these programs were set in haste, executed poorly, and have done little to restore stability in the marketplace,” she said.

As The Iowa Independent reported in 2009, the Home Affordable Modification Program hasn’t performed as well as expected. Despite placement of $29 billion into the program that would allow banks to alter loans to make them more affordable, only 116,000 such modified loans had been made permanent as of the end of February last year. Democrats have charged that the problem lies not with the program itself, but the fact that the Obama administration relied on private mortgage servicing companies to provide the modified loans.

The goal of the program was to have reached around four million struggling homeowners by 2012. As of February 2010, nearly one million homeowners had entered into trial modifications, although there is no guarantee that such altered loans will become permanent after the 90-day trial, according to Phyllis Caldwell, who leads the federal program. And, even if the loans reach permanent status, many homeowners ultimately re-default. Currently, about 500,000 loans have been modified under the program, and only $840 million of the $29 billion invested in the program has been spent.

Although Democrats seem poised to fight for the other three programs on the chopping block, statements issued by U.S. Rep. Barney Frank (D-Mass.), who serves as ranking member of House Financial Services, neglected to mention the Home Affordable Modification Program.

Congress appropriated $7 billion for the Neighborhood Stabilization Program, which included $2 billion in stimulus funds. Two round of funding through the program have been provided to states and localities, but the bill being drafted by House Republicans would prevent a third round of roughly $1 billion in funding.

According to information from the Iowa Department of Economic Development, the state received roughly $21.5 million in funding as an adjunct to the Community Development Block Grant Program to provide emergency assistance to state and local governments to acquire and redevelop foreclosed properties that might otherwise become a source of abandonment or blight. Of that funding, approximately $4 million was earmarked for Des Moines and $1.5 million for Davenport. The cities of Cedar Rapids, Council Bluffs and Sioux City each had about $1.2 million allotted during state formulas, and the cities of Waterloo, Dubuque and West Des Moines were also expect have shares of the money to combat blight. The cities were singled out based on a formula used to calculate “Entitlement Cities,” and the department noted that if any decided not to accept the funding, the monies would instead be moved into a competitive application pot.

Nationally, of the roughly $8 billion that was appropriated for the FHA Refinance Program Termination Act, only about $50 million had been disbursed (about 35 applicants as of December 2010). The bill by House Republicans seeks to terminate the program and rescind all unused funding. It is unclear how much of the disbursed funding, if any, has made it into Iowa.

The Emergency Mortgage Relief Program is a reauthorization of the 1975 Emergency Homeowners’ Relief Act that was made possible by the larger Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law in July 2010. It provided $1 billion for the U.S. Department of Housing and Urban Development to make mortgage relief payments to homeowners facing foreclosure for up to 12 months, and provided a pathway to an additional 12-month extension.

Perhaps not surprisingly, this was the piece of legislation most defended by Frank, who said the program is designed not to help people who were “imprudent or irresponsible,” but those that are unemployed. He called it “the single most effective anti-foreclosure program that has been put forward,” and noted that Alabama, Bachus’ home state, had a similar program in place.

If Republicans want to cut spending, Frank said, “there are better ways … than by attacking these programs.”

The proposal, according to a HUD press release, would do the following:

Prohibiting lenders from using sexual orientation or gender identity as a basis to determine a borrower’s eligibility for FHA-insured mortgage financing. FHA’s current regulations provide that a mortgage lender’s determination of the adequacy of a borrower’s income “shall be made in a uniform manner without regard to” specified prohibited grounds. The proposed rule would add actual or perceived sexual orientation and gender identity to the prohibited grounds to ensure FHA-approved lenders do not deny or otherwise alter the terms of mortgages on the basis of irrelevant criteria.

Clarifying that all otherwise eligible families, regardless of marital status, sexual orientation, or gender identity, have the opportunity to participate in HUD programs. In the majority of HUD’s rental and homeownership programs the term “family” already has a broad scope, and includes a single person and families with or without children. HUD’s proposed rule clarifies that families, otherwise eligible for HUD programs, may not be excluded because one or more members of the family may be an LGBT individual, have an LGBT relationship, or be perceived to be such an individual or in such relationship.

Prohibiting owners and operators of HUD-assisted housing, or housing whose financing is insured by HUD, from inquiring about the sexual orientation or gender identity of an applicant for, or occupant of, the dwelling, whether renter- or owner-occupied. HUD is proposing to institute this policy in its rental assistance and homeownership programs, which include the Federal Housing Administration (FHA) mortgage insurance programs, community development programs, and public and assisted housing programs.

The proposed rule can be reviewed here.

Last year, HUD required all groups and organizations receiving federal support to follow local and state non-discrimination ordinances, including those which prohibit discrimination on the basis of sexual orientation or gender identity. It is also conducting the first ever study of LGBT people and housing needs.

The National Gay and Lesbian Task Force praised the agency for the new rule in a press statement Thursday. Rea Carey, executive director of NGLTF, released the following statement:

“These are critically important reforms given that lesbian, gay, bisexual and transgender people remain particularly vulnerable in seeking or retaining housing due to widespread bias, discrimination and a lack of housing protections. We’re talking about one of the most fundamental needs a person can have: shelter. Everyone should be able to obtain affordable housing free from discrimination, have a safe place to live and a roof over their head.

“We’ve heard painful stories over the years from lesbians, gay men, bisexual and transgender people who were discriminated against when trying to secure a home. These reforms will go a long way toward ending an injustice that has had such a profound and far-reaching negative impact on people’s lives. What this means for our community is greater access to and protections for safe and secure housing. HUD plays a major role in low-income housing programs and the private mortgage market. These proposed steps would do much to help our families. LGBT low-income families regardless of where they live will have equal access to HUD housing programs. LGBT people will be judged based on credit-worthiness for mortgages without regard to sexual orientation or gender identity. And, LGBT families would be included in the definition of family for HUD-related programs.

Michigan has no state law prohibiting discrimination on the basis of sexual orientation or gender identity in employment or housing, and only a handful of municipalities and even not all of those prohibit discrimination on the basis of gender identity.

A school damaged by Hurricane Katrina. (Flickr, Paul Baker)

This week, The Washington Independent is featuring a series of investigative stories on the rebuilding of New Orleans, five years after Hurricane Katrina. Find all of them here.

After Hurricane Katrina hit the Gulf Coast, the federal government began the most expensive long-term rebuilding project in American history. The Department of Housing and Urban Development, the Federal Emergency Management Agency and other organizations sent billions of dollars — the Greater New Orleans Community Data Center puts the total at $45 billion — to the Gulf Coast for the repair and reconstruction of housing, primarily, but also for the rebuilding of infrastructure like roads, sewers, libraries and prisons. In Louisiana, however, by far the biggest chunk of infrastructure funding is going to schools. But that does not necessarily mean that schools have come back online quickly enough. Indeed, despite the government’s best efforts to funnel a lot of cash fast to education, the pace of recovery remains slow.

[Environment1] Over the past five years, the recipient of the largest slice of rebuilding money in the state has been the Recovery School District, which took over most of New Orleans’ public schools after the storm. Since Katrina, the RSD has been allocated more than $763 million, according to a TWI analysis of data from the Louisiana Recovery Authority. In his speech Sunday, President Obama touted a settlement between FEMA and New Orleans’ schools that would send another substantial injection of funding into the system. “Just this Friday, my administration announced a final agreement on $1.8 billion dollars for Orleans Parish schools — money that had been locked up for years — so folks here could determine how best to restore the school system,” he said.

Even before this agreement, K-12 public schools as a group were slated to receive more than $1.7 billion — more than three times as much as the next largest group of recipients, hospitals and health care providers. Add to that sum this new infusion, which represents more than $900 million in additional funding, along with money received by K-12 private schools ($521 million), public higher education ($195 million), and private higher education ($144 million), and the total rebuilding money for Louisiana schools comes to more than $3.4 billion.

Since taking office, the Obama administration has promised to “cut the red tape and bureaucracy” for the recipients of disaster recovery money, as the President said Sunday, and the agreement with New Orleans’ schools helps the administration argue it is keeping that promise. The process that the Recovery School District had to navigate to get to this point, however, goes a long way towards explaining why, five year after Katrina, the city is still just beginning the process of rebuilding.

As recently as December, Janet Napolitano, the secretary of Homeland Security, looked outside the Recovery School District for an example of how FEMA funding was reviving New Orleans. She held up Holy Cross, a private Catholic academy, as evidence that the administration was helping to “cut through red tape and streamline and expedite the decision-making process for public assistance” in the Gulf Coast. (The red tape trope is a refrain for the Obama administration: Secretary Napolitano used similar language when describing the RSD settlement on Friday.) Holy Cross’ old campus was located in the Lower Ninth Ward. After Katrina, the school’s leaders decided to move it to Gentilly, a neighborhood left less damaged by Katrina. In the fall of 2009, the school welcomed students to its new campus; by this winter, phase one of the school’s reconstruction, complete with a new gym and performing arts spaces, should be complete.

Holy Cross raised money from private investors to help finance its rebirth, but it is also down for $82 million of FEMA funding, more than $70 million of which the school has already received, according to the Louisiana Recovery Authority’s data. The school ranks 20th on the list of the Louisiana funding applicants who have had the most money obligated to them, according to TWI’s analysis.

Holy Cross had to overcome its share of bureaucratic hurdles, but with the help of a local consultant with experience in public assistance grants and with the support of officials from the local to the federal level and of the surrounding community, the school was able to navigate the  process, says Stanton Vignes, who served on the executive committee of the school’s board for the past six years. “The process is tremendously bureaucratic and ever-changing, but we always realized it was a process,” he says. “We had a direction; we knew what we were doing; we knew where we wanted to be. That’s why we were so far ahead of the curve.”

The Recovery School District is not lagging so far behind; it opened the Langston Hughes Elementary School in August 2009, around the same time Holy Cross occupied its new campus. But ultimately, between rebuilding and repairing, the district needs to bring 87 school campuses up to snuff. (The final total depends on how the city’s population rebounds.) Langston Hughes was one of five Quick Start schools chosen for fast-tracked construction. Students occupied three additional schools in January 2010, and the fifth, L.B. Landry High School, opened in early August.

Across the city, however, more than 7,000 public school students, almost one out of every five, are still learning in “modular classrooms” — essentially, trailers. The New Orleans Charter Science and Math Academy, known as SciAcademy, has been in modular classrooms since 2008, its first year of operation, for instance. SciAcademy is one of the success stories of the post-Katrina education system: In its first two years, it has taken struggling high school students, some of whom were reading at a third-grade level, and brought them up to age-appropriate levels of achievement. This month, the school’s staff was preparing for the students’ arrival, rehearsing their plan for the first day and practicing responses to dicey situations, when the news came that they would have to pack up the entire school and move to a new, but still temporary, site.

“The capacity to find a facility is not tied to school performance,” says Ben Marcovitz, the school’s principal. “I understand that, but I really wish there was a clearer path.”

Part of the problem is that, initially, to receive funds from FEMA, the Recovery School District had to work on each project independently, which slowed down the entire process. Each building had its own project worksheet, used to assess damages and determine compensation. “Very early on, you may have had the same problem on every project, but FEMA treated every project differently,” says Lona Hankins, the district’s director of capital projects. “They’d rule differently. We’ve had to learn to fight those battles on a system-wide level.”

Without the lump settlement, it was more difficult for the district to plan the wholesale reconstruction of the school system. Earlier this month, for instance, the Recovery School District released a draft plan of long-term building assignments for all schools currently operating in the district. The reconstruction plan is divided into phases, however, and school leaders slated for buildings in later phases wondered if the district would be able to fund its ambitious plan.

Now, however, that worry is moot. The district estimated the cost of its master plan at $1.6 billion; the $1.8 billion FEMA settlement should be sufficient to rebuild or repair the rest of the district’s schools, if the process continues according to plan. The district has hired a pool of architects to take on the remaining projects as they reach the head of the line. Now all that remains to do is build the schools. The 24 new or totally renovated schools in phase one of the reconstruction plan should all be open by the fall of 2013. After that, the district will have only five more phases of construction to complete before New Orleans’ schools are finally rebuilt.

Last month, housing slumped to its worst state in decades. The National Association of Realtors said home sales declined 27 percent to a 15-year low. And the Commerce Department said sales of new single-family houses dropped 12.4 percent between June and July, to the lowest level in the 47 years the department has kept the data. Foreclosures remain high. And many economists predict a second national decline in home prices.

Reviving the Obama tax credits might halt or slow that second leg down, and it might be worth doing for that reason. But some data indicates the credits merely convinced people who were going to buy houses anyway to buy sooner, rather than bringing in new juice. And mortgage reduction seems a better way to keep families in homes and stabilize housing.

The Washington Post reports Housing and Urban Development Secretary Shaun Donovan will tell the House Financial Services Committee that the agency wants to increase the up-front cash paid by borrowers,  raise minimum credit scores for borrowers, and limit how much money sellers can kick in, including paying closing costs or giving free upgrades.

The proposals for tighter standards come as the FHA handles a much larger share of the mortgage market than in the past, and more of its loans go bad. As we explained, FHA loan volume has quadrupled since 2006, and a rising number of defaults has prompted fears the agency will be the next in line for a government bailout.

From The Post:

In the past, the FHA has resisted raising down payments or insurance premiums for fear of shutting out qualified borrowers and stunting the housing market’s slow but steady recovery.

But Donovan plans to tell the House committee that the exploding volume of loans the FHA is now handling requires stricter risk controls than the previous administration had in place, according to a copy of his prepared testimony. A recent audit shows that the FHA’s financial cushion already has eroded below the level required by law.

It’s important to connect the dots here, from mortgage fraud schemes to the FHA. Investors that commit mortgage fraud while flipping short sales or through other schemes increasingly have been finding ways to fund their deals through the FHA, as we noted. In some cases, they have been evading FHA anti-flipping rules by setting up land trusts to purchase and hold real estate, and to obscure the identity of the actual purchaser.

As Yves Smith at Naked Capitalism explained, the FHA has been put in a difficult position as a result of the financial crisis:

It is really a shame to see what has happened to the FHA. Prior to the subprime bubble, the FHA has a good record with providing low down payment loans to borrowers. Before readers scoff, it had a simple secret: it screened borrowers. And the old-fashioned process was sufficiently time-consuming that the prospective homeowners also had to grapple with whether they could make the payments…But now the FHA has been assigned a role in the “save the housing market” game plan, which means notions of prudence get compromised.

But it’s even more than that. As we reported nearly a year ago, both the FHA and HUD were mostly ignored during the Bush administration — but now are being called on to turn on a dime and play major roles in saving the mortgage and housing markets.

The FHA must turn itself around and operate at its peak, after years of neglect. While the Obama administration tackles the stimulus plan and other urgent problems, government agencies like FHA and HUD, long relegated to the sidelines, are being called on to ramp themselves up and take on greatly expanded tasks. With the financial crisis so severe, the revitalization has to happen immediately – and there’s no Plan B. Getting these agencies back up to speed is an overlooked challenge facing the new White House regime.

Rising fraud in FHA loans is one example of that challenge. The new rules are a step toward addressing the problem. But the administration also needs to make a top priority of providing the FHA with the resources to put in place additional risk controls and other necessary changes to handle its much larger role. Banks that aren’t lending have gotten most of the government’s attention and money, even as rising fraud in FHA loans is threatening the housing market, and the economy, as a whole. It’s long past time to change that.

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

Rising defaults have eaten through the FHA’s cushion. Some 7.8% of FHA loans at the end of the second quarter were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, a figure roughly equal to the national average for all loans. That is up from 5.4% a year ago.

TWI wrote in January about concerns regarding the FHA and its dwindling insurance portfolio. As we noted then, Washington housing consultant Howard Glaser pointed out that with its larger share of the housing market, the FHA was becoming a $2 trillion company without a risk control officer. If that doesn’t make you nervous, it should.

But the bigger issue for the FHA — and for some other government agencies — is the legacy left by the previous two administrations. Beginning, in fact, with former Vice President Al Gore’s Reinventing Government initiative but expanding with a vengeance and an anti-government fervor during the Bush years, the idea of downsizing government reigned supreme. The FHA, like its parent agency, the Department of Housing and Urban Development, was shunted aside, stripped of many of its powers and personnel, left to languish and demoralized. Now a smaller and weakened FHA is supposed to turn on a dime and save the mortgage market. Little wonder the agency is running into problems.

Here’s how Sheila Crowley, president of the National Low Income Housing Coalition, summed things up in January for TWI:

“When you’ve been operating under a belief system that government is the problem and is not helpful, which has been the direction under the Bush Administration, people get demoralized and that makes it harder to get anything done,” she said. “HUD and the FHA have lost a lot of people and they’ve been neglected over the past eight years. There just aren’t enough people left to do everything the government is asking them to do. It’s a pretty hefty assignment to turn them around.”

The FHA has never had to ask for government help since it began in 1934. That may change, if loan defaults keep growing and the insurance fund shrinks even more. If there’s yet another taxpayer bailout, the government won’t need to look far to find someone to blame.

You can’t pin this one on Republicans alone. It’s true that Sen. Johnny Isakson (R-Ga.) came up with the idea to revitalize the proposal, which first surfaced earlier this year in negotiations over the stimulus package – -but Senate Banking Committee Chairman Christopher Dodd (D-Conn.) is a co-sponsor. Coincidentally, I’m sure, Dodd is in the midst of a tough re-election battle. I’d imagine offering a $15,000 credit for first-time homebuyers and eliminating any income ceilings so even wealthy people are eligible probably will lpay pretty well in Greenwich.

First, a little background. As TWI reported recently, Congress approved the $8,000 tax credit as a way to jumpstart the housing market, and HUD came up with a plan to allow homebuyers to access the credit immediately for downpayment money. This seemed slightly problematic to many, given the long history of fraud and abuse associated with downpayment assistance schemes for government-backed loans. Also, some wondered why the government was helping people who couldn’t afford downpayments to buy houses, given that having no skin in the game leads to defaults, which was supposed to be one of the lessons learned from the mortgage crisis.

To its credit, HUD came out with revised guidelines for the program, requiring borrowers to put down some of their own money for the downpayment, along with accessing the credit. And it issued stern warnings to third-party firms that might try to offer bridge loans for the credits at high interest rates.

That should have ended it. But then lawmakers came up with the new idea to increase the size of the credit and open it to everyone. Here’s how Clusterstock summarizes it:

The government continues its desperate effort to make the cost of dwelling more expensive. There’s already an $8,000 homebuyer tax credit, but it’s obviously not done enough, so Senators Johnny Isaacson and Christopher Dodd are proposing to up it to $15,000.

And, perhaps more importantly, they’re eliminating the income requirements. Under the previous tax credit, a couple had to have a combined income of less than $150,000. Now any upper-middle class homebuyer is eligible, and hopefully this will get the McMansion sales going again.

Yes, that’s just what America needs – more McMansions.

It’s true that interest rates are jumping and the housing market isn’t exactly soaring. And the Obama administration’s homeowner rescue plan isn’t quite taking off, either. Those are serious problems that need to be addressed. Is handing out a $15,000 tax credit the best way to accomplish that?

If this tax credit expansion passes, look for someone to suggest a way to let borrowers turn it into downpayment money. Then they can buy bigger houses than they probably can afford.

We might not have learned much from the current foreclosure crisis, but at least the builders of all those McMansions will be happy.

But his enthusiasm isn’t universal.

Illustration by: Matt Mahurin

Amid the buzz the program has generated over the possibility of jumpstarting the sluggish housing market, some worry that “monetizing” a tax credit – which means providing homebuyers with short-term loans secured by their expected tax refunds, so they can gain quick access to the money – isn’t quite as simple as it sounds.

It could make borrowers vulnerable to the same predatory abuses that plague the Earned Income Tax Credit program, an anti-poverty government effort. That program remains a regular target of tax preparation companies, which partner with banks to aggressively market short-term, high-rate Refund Anticipation Loans secured by the refund. Recipients – the working poor – often fork over as much as one-third of their refunds in charges and fees, in order to get their money a week or two earlier. The loan is repaid when the actual refund arrives.

It’s possible that unscrupulous lenders could launch homebuyer tax-credit programs of their own, profiting from the publicity over HUD’s initiative. It’s not clear if the Federal Housing Administration, which has seen its share of the mortgage market explode from less than three percent to more than 30 percent in the past few years, will have the resources to police the program adequately. And with government the largest source of mortgage money in a tight credit environment, “people are going to try to take advantage of it” through fraud, said Ann Fulmer, of vice president of business relations for Interthinx, a provider to lenders of fraud prevention services.

Beyond all that, some decry the idea of helping people buy homes who can’t come up with downpayment money on their own, calling it the kind of thinking that led to the mortgage crisis in the first place. Congress approved the credit as part of the stimulus package approved in February.

Interest in the downpayment program is so intense that earlier this week, when HUD mistakenly posted a mortgagee letter with guidance for the program on its website, then took the letter down, reports spread in the blogosphere that the program had been killed. A HUD spokesman confirmed the speculation was false and that the program was going ahead as planned.

And so is the controversy.

At Minyanville, a financial information Website, real estate consultant Andrew Jeffery declared that “subprime lending has come roaring back,” noting that a few states already have started similar tax credit programs. Financial recklessness, he said, isn’t coming from Wall Street this time around, but from the government itself. As Jeffery put it, federal and state governments are “in a rush to prop up home prices and delay the ultimate day of reckoning” by insisting on “coercing taxpayers to over-leverage themselves” and take on debt they can’t afford.

Peter Morici, an economist and business professor at the University of Maryland, was equally blunt. “If you can’t save for a downpayment, should you be buying a house? It’s like we’re saying, ‘People who can’t save a cent and who can’t let go of their credit cards should get downpayment assistance.’”

Morici also called the program a “total payoff to builders,” who lobbied heavily for the tax credit.

But others aren’t so quick to criticize. They point out that the government is just trying to balance helping out a housing market desperate for buyers with avoiding the kind of risky lending that created the crisis. Fulmer, of Interthinx, noted that the FHA is working hard to “walk a tightrope” – making sure that moderate income buyers still have a shot at buying homes, given steep new downpayment requirements, while backing responsible and sound lending.

“There are competing goals,” said Brian Chappelle, a former FHA official and founding partner of Potomac Partners, a Washington mortgage industry consulting firm. “They want to stimulate housing and economic activity and they also want the borrower to “have skin in the game.”‘

The downpayment idea has attracted widespread interest, with the Wall Street Journal calling it a possible “game changer” for the moribund housing market. In the end, said Chappelle, “our economic problems trump risk concerns.”

In his speech to the National Association of Realtors, HUD’s Donovan said that “we all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a downpayment.” He said the FHA will allow “trusted FHA-approved lenders,” as well as HUD-approved nonprofits, and state and local government entities, to monetize the credit through short-term bridge loans.

HUD spokesman Brian Sullivan said he couldn’t comment further, except to say that the FHA is continuing to work out final details.

The program is expected to mirror efforts already in place in a handful of states, including Missouri, Delaware, New Jersey, Washington, and Pennsylvania. Under those programs, the states offer bridge loans that allow buyers to borrow against their tax credit for down payment and closing costs, then repay it when their tax refunds arrive. If the borrower doesn’t pay, the unpaid loan becomes a lien on the property, at a slightly higher interest rate, which means the borrower faces higher monthly payments over the next decade.

The FHA has run into trouble in the past with down payment programs. Congress last year banned a seller-funded down payment assistance program that led to high default rates on FHA loans. As TWI reported recently, supporters of the banned program, including builders, Realtors, mortgage brokers, and some in Congress, are trying to revive it.

Under the seller funded program, the FHA allowed homeowners to get down payment help from nonprofits or charities funded in part by sellers. But sellers often raised the sales price of a home to cover the cost of the down payment “gift.” The charity or nonprofit that supplied the down payment money was reimbursed by the seller for it, along with service costs and fees, once the deal closed. Borrowers paid for it all, whether they realized it or not. The Internal Revenue Service called the whole thing a scam and revoked the charitable status of seller-funded providers.

Aaron Krowne, founder of the Mortgage Lender Implode-o-Meter, a website that tracks the mortgage industry and is leading a campaign in the blogosphere to block any reinstatement of the seller-funded down payment assistance program, said he doesn’t have the same concerns about the homebuyer tax credit idea.

“It differs significantly from SFDPA (seller funded down payment assistance) in that the seller has no specific inducement to inflate the price, nor is there any third party who earns a fee for laundering a “contribution” from the seller,” he said. “So, in my opinion, it is a bad macroeconomic inducement and is bad policy — but it isn’t criminal and dishonest with likely knock-on effects like SFDPA.”

In addition, the FHA is likely to keep a close watch on the entities it approves to make the short-term loans, and will limit the costs and fees that can be charged, noted Robin Medecke, a researcher at the Mortgage Lender Implode-o-Meter.

Her worries about the program, she said are different.

“Where I would be concerned is the possibility of Fannie and Freddie adopting similar guidelines with limited or no power to dictate or enforce similar restrictions,” she said. “That’s the real as-yet-unopened can of worms, in my opinion, and if it’s further extended to the secondary market, thereby opening up the tax credit advance to private investors, the potential for abuse increases exponentially.”

HUD’s goal in developing the program was to encourage lenders issuing the mortgages to also make the short-term loans to the borrowers, noted Chappelle, the former FHA official. But Chappelle spoke with several small and regional lenders last week, who said they aren’t interested in doing so. Only government agencies and approved nonprofits can issue a lien on the property if the loan goes unpaid, he said.

“While the lender can make the loan, I hear that most won’t do it because it must be unsecured,” Chappelle said. “It can’t be attached to the property. No question some of the tax credit could be abused by entities that will step-in and make these loans.”

Guy Cecala, publisher of Inside Mortgage Finance, which covers the lending industry, agreed, saying an “obvious problem” is that predatory lenders will start marketing similar homebuyer tax refund anticipation programs, “piggy backing on the publicity surrounding the non-profit products authorized by HUD.”

While Donovan referred to “trusted” FHA-approved lenders that will be allowed to participate, Cecala also questioned that assurance. “It gets a little trickier when you bring FHA-approved mortgagees into the mix since that group includes brokers – and probably former subprime lenders,” Cecala said.

Business Week magazine reported last year that subprime lenders with histories of abuses were turning to FHA-backed loans.

The biggest question about the program is whether of the agency has the ability to monitor it for fraud, said Sonia Garrison, a senior researcher with the Center for Responsible Lending. The FHA was downsized over the past decade as it played a smaller role in the mortgage market.

“We’ve got to be able to get the FHA the resources it needs to police the program properly,” she said.

And to draw the fine line between helping the housing market, and keeping a lid on risky lending.