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Democrats back massive expansion of FHA guarantees

Frank bill aimed at refinancing 2 million mortgages

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A top Democrat wants to give the Federal Housing Administration authorization to provide an additional $300 billion in mortgage guarantees to help refinance up to 2 million loans in cases where lenders agree to "substantial" principal write-downs. A bill proposed by Rep. Barney Frank would require that lenders -- or the investors who hold the rights to service a mortgage -- agree to write-downs large enough to insulate FHA from losses and provide a "meaningful reduction" in a troubled borrower's monthly payments. According to a summary of the bill released by Frank, D-Mass., the write-downs would have to be large enough to bring the loan-to-value ratio on the new, FHA-backed loan, to no more than 90 percent of a property's current appraised value. Lenders would be limited to recovering no more than 85 percent of the property's current value as payment for the existing loan, allowing FHA to establish a 5 percent loan loss reserve. The chairman of the H...