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Could home-loan rescue bill sink FHA?

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KAI RYSSDAL: The housing crisis was back at center stage today on Capitol Hill. The House is debating its $300 billion rescue package, the one sponsored by Democrat Barney Frank. Frank is the chairman of the Financial Services Committee. His bill would dramatically increase the role of an agency called the Federal Housing Administration, as part of its try at cleaning up the subprime mess.

Marketplace’s Nancy Marshall Genzer takes a look at whether the FHA’s up to the job.

NANCY MARSHALL GENZER: The FHA was created at the height of the Depression. It doesn’t lend money. It insures mortgages, but it’s avoided the subprime crowd. It usually works with borrowers who’ve saved up a deposit and prove they can make monthly payments. The House bill sponsored by Massachusetts Democrat Barney Frank requires the FHA to take on much riskier loans.

MEG BURNS: But we do have serious concerns about Barney Frank’s bill.

Meg Burns helps oversee FHA’s home mortgage insurance program. She says the bill sticks the FHA with bad loans taken out by over-stretched borrowers who are beyond help.

BURNS: There are some families who simply are out of reach, even for the FHA.

Burns says those families will default on their loans. Under Frank’s bill, the FHA would be left holding the bag. Tottering under that load, it would need more money from taxpayers, more than $2 billion, according to the Congressional Budget Office, but Princeton economist Alan Blinder says that’s just a fraction of what the savings and loan bailout cost two decades ago. He says the FHA is up to the task.

ALAN BLINDER: The FHA is going to have to staff up substantially and change in character somewhat, but that seems to me a small price to pay.

But Guy Cecala of Inside Mortgage Finance says the best solution may be beyond the FHA or Congress.

GUY CECALA: The real solution is time, and nobody wants to wait a year or two and see all the people put out of their homes, but to some extent that’s the only sure thing at this point.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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