With the mortgage meltdown showing few signs of resolution, a new idea has emerged in Washington: Let the FHA get a piece of the action.

The proposal by Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, would open the FHA program to large numbers of homeowners who are now stuck with toxic loans. You can bet there's a lot of risk in such refinancing, so much risk that the traditional mortgage insurance premium charged under the FHA program could be insufficient to cover all losses.

To make the program financially viable, Frank suggests that the FHA should get a piece of the action: Under his plan, H.R. 5830, there would be a declining percentage fee on any profits to discourage short-term speculators. The fee would be equal to 100 percent of all profits in year one, 80 percent in the second year and so on for the first five years. After five years there would be an "exit" fee equal to 3 percent of the sale price.

Normally you would look at the Frank proposal and say no chance. But we do not have a normal mortgage marketplace: A lot of people are in financial trouble and getting 97 percent of any profit after five years is a lot better than facing the total loss of equity that a foreclosure would represent.

Under the Frank plan mortgage investors would also face losses if their mortgages were refinanced under the FHA program. But even for investors it's better to have a limited loss rather than the massive write-offs associated with foreclosures.

What Rep. Frank proposes will be painful for both lenders and borrowers, but the voluntary efforts trotted out by the Administration and the bloated claims by HUD for its FHASecure program have done nothing to stem the foreclosure tide. The Frank proposal is not a free pass for borrowers and not a give-away to lenders, reason enough to take it seriously.

Published: April 23, 2008

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