By: Victoria McGrane

House Financial Services Committee Chairman Barney Frank has put the mortgage industry on notice: Passage of the landmark housing bill doesn’t get it off the hook.

In the next few months, the mortgage finance industry will be under pressure to show results and convince Congress that it’s doing everything possible to stem the tide of foreclosures across the country. Its lenders and loan servicers will have to do so against the backdrop of a record number of delinquencies and rising foreclosures.

If the effort fails, Frank and his fellow Democrats have several policy options waiting — but nothing that industry groups want to see become law.

The massive housing legislation that cleared the Senate on Saturday gives the industry an additional tool to fight foreclosures. The bill includes a $300 billion program to help distressed borrowers refinance into cheaper Federal Housing Authority mortgages, conditioned on lenders’ willingness to reduce a mortgage’s principal.

But that program won’t take effect until Oct. 1. So during a committee hearing last Friday, Frank, the program’s chief architect, urged lenders and servicers to wait until the program is up and running to file foreclosure on homeowners who may qualify.

The Massachusetts congressman also warned that if lenders and investors can’t prevent foreclosures, they can expect more sweeping legislation next year.

“The industry is going to need to tell Congress how they’re working through that challenge” of growing numbers of borrowers in trouble, said Erick R. Gustafson, vice president of government affairs for the Mortgage Bankers Association.

“If we do a good job, then there won’t be a lot of political fallout,” he said. “If we’re unable to perhaps utilize all these tools as effectively as Congress would like us to, then I’m not sure exactly what will happen.”

The industry says that, since July 2007, it has helped nearly 1.7 million borrowers avoid foreclosure through the Hope Now alliance, a voluntary industry effort spearheaded by the White House. Consumer groups, though, contend that the industry’s numbers overstate its accomplishments.

The consumer groups are pushing for additional measures, even though the chances for enactment during this dwindling election-year congressional session are slim. They have been vocal about their belief that the legislation’s foreclosure prevention program won’t be as successful as it is being billed.

“The impact is likely to be modest due to the relatively few borrowers to be aided by the package,” the National Community Reinvestment Coalition said last week.

The Congressional Budget Office estimates that the program will assist as many as 400,000 homeowners.

But consumer advocates, as well as some in the mortgage industry, say the number will be much lower. Some private estimates peg results as closer to 70,000 homeowners.

Meanwhile, many economists predict that foreclosure filings will spike at 2.5 million by the end of the year. And the trouble will get worse before it gets better.

“It’s pretty clear that even if it’s at the high end of that range, more will need to be done to help families avoid foreclosure” and the downward spiral in home prices being driven by rising foreclosure rates, said Michael Calhoun, president of the Center for Responsible Lending.

Consumer and civil rights groups are pushing for passage of a bill by Rep. Maxine Waters (D-Calif.) to require loan servicers, companies that administer mortgages when the loans are packaged and sold to investors as securities, to explore options to keep homeowners in their homes before moving to foreclosure.

These groups also support another bill by Rep. Doris O. Matsui (D-Calif.) to impose a nine-month foreclosure “timeout.” The legislation aims to give overwhelmed lenders and servicers time to help the ever-growing throngs of distressed homeowners.

The measure, supporters argue, would give the FHA refinance plan a chance to work because it would likely take many months past Oct. 1 to reach full capacity.

The mortgage industry, however, says both bills would cause lenders to cut back credit, hurting consumers.

Although there’s little time or energy left in Congress to tackle more housing bills this session, the second stimulus package Democrats want to move in September could provide a vehicle for either the Waters or Matsui bill, Calhoun suggested.

“If the foreclosure numbers continue to mount, and if lenders fail to agree to defer foreclosures while the FHA program is being ramped up, then there will be increasing pressure” on Congress to act, he said.

And an old industry enemy could rear its head next year if Congress is unhappy with foreclosure prevention efforts: the dreaded bankruptcy bill that would give bankruptcy judges the power to reduce mortgage principals and interest. Consumer advocates say real foreclosure relief will come only with such a mandatory workout option.

Frank also has his eye on the very structure of the mortgage finance industry. If it turns out that the complex relationship between third-party servicers and investors holding pools of mortgages renders servicers unable to work out distressed mortgages, “then I am determined to change that structure,” Frank said at Friday’s hearing.

“I’m not looking to make that disruption,” he said, “but that’s one of the things at stake here.”

“We think our members are going to use this,” MBA’s Chairman-elect David G. Kittle said of the new legislation.

Loss mitigation officials from Bank of America and Wells Fargo’s mortgage servicing arm assured Frank’s committee that they plan to use the FHA program and other tools to keep borrowers in their homes. And lawmakers grilled them on Friday about whether they have dedicated enough resources to the mounting foreclosure problem.

At one point, Waters asked whether Bank of America, in the process of acquiring subprime giant Countrywide, had sufficient staff working on modifications to “deal with this awesome problem” it acquired.

The company has added about 500 staff members over the past three months and will continue to add people monthly as needed, said Michael Gross, the bank’s managing director of loan administration.

“Our goal is to modify and work out at least $40 billion in mortgages by the end of 2009 and keep all those families,” more than 250,000 homeowners, in their homes, he testified.

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