Ensuring prudent policy in a crisis atmosphere.

The real estate finance industry has never experienced as much time in the media and congressional spotlight as it has in the last 24 months. I actually remember brainstorming ways to get any of the presidential candidates to even talk about housing affordability during the 2004 election. Now each candidate has a fully formed housing platform.

And while the spotlight brings tremendous opportunity, it also brings the risk of rushed and ill-considered policy-making. The Mortgage Bankers Association's (MBA's) recent efforts on bankruptcy reform and Federal Housing Administration (FHA) modernization illustrate the challenges in helping cooler heads prevail on Capitol Hill.

When you boil it all down, there are essentially two ways that work gets done in Washington, D.C. The first is through consensus, which brought us last year's energy bill as well as the agreement to extend the Terrorism Risk Insurance Program. And the second is through crisis, which brought us billions of dollars in post-Hurricane Katrina Gulf Coast funding in 2006, February's economic-stimulus package that included a temporary increase in the loan limits for both FHA and the government-sponsored enterprises (GSEs), and the Senate's housing-stimulus/foreclosure-prevention package in April.

Consensus building is a slow, arduous process that generally results in a law that is neither side's ideal but with which both sides can live. Crisis decision-making, on the other hand, can bring significant change at a surprising pace and often produces more dramatic winners and losers as well as a host of unintended consequences.

As we go to press, we have, so far, staved off one dangerously bad, crisis-driven policy idea--bankruptcy cramdowns. Bankruptcy cramdown authority essentially gives bankruptcy judges the discretion to unilaterally modify the terms of mortgage contracts to reduce the amount of the mortgage for a borrower in bankruptcy.

As soon as this idea began to gain traction on the Hill last year. MBA began working to defeat the proposed legislation. Most visibly, MBA set up its Stop the Bankruptcy Cramdown Resource Center (www.mortgagebankers.org/stopthecramdown), where visitors could see MBA's estimate of how much this policy would increase monthly mortgage payments on the average home loan in their state.

MBA has worked hard to clarify that introducing further uncertainty and risk into the current market will only increase the cost of credit for all borrowers. We have published several editorials by MBA's officers in key newspapers, worked closely with reporters and columnists, conducted regular lobbying visits with Hill staff and deployed MBA members both in person and via an e-mail campaign to get our message out.

To date, our extensive efforts have been successful: The bank-ruptcy cramdown provision was rejected as part of the Senate's April housing-stimulus/foreclosure-prevention package after several hours of debate featuring MBA's facts and figures. Its proponents also attempted and failed to have bankruptcy cram-down included as part of other legislation. The fight is not over, but the momentum is, for now, in the right direction.

FHA's time in the spotlight as a potential hero has also brought FHA modernization closer to becoming a reality than it has ever been. But the crisis momentum on housing issues also threatens to put unprecedented demands on FHA, raising potential concerns about resources and capacity.

Empowering FHA with the tools it needs to modernize its single-family and multifamily operations has been a top industry priority for several years. Last year, MBA's painstaking consensus-building efforts culminated in a significant victory when both the House and the Senate Passed different pieces of legislation that, between the two, contained most of the legislative changes needed to modernize FHA. Years of work brought the ball within one yard of the end zone.

Recent congressional focus on FHA, however, has been fueled by adrenaline. "Rescue plans" have emerged from various quarters, including regulators, academics and, of course, Capitol Hill. FHA is positioned as the white knight in many of these plans--especially those championed by House Financial Services Chairman Barney Frank (D-Massachusetts) and Senate Banking Committee Chairman Christopher Dodd (D-Connecticut).

Currently, FHA insures just fewer than 4 million first-lien single-family mortgages and 12,032 multifamily projects with 1.4 million units. Its insurance in force as of March 31, 2008, was estimated to be more than $400 billion. FHA experienced a significant jump in applications in 2007, with 50 percent more applications in December 2007 than in December 2006.

The most recent data from the Department of Housing and Urban Development (HUD) show that applications are up 184 percent from a year ago and endorsements are up 126 percent from a year ago. Depending on the version, estimates are that a new rescue plan could increase the number of FHA-insured mortgages by 500,000 first-lien loans, or 12.5 percent.

While widespread recognition of the critical role FHA can play is good news, failure is certain if we expect this 73-year-old agency to play a significantly increased role without first making extensive operational improvements.

There are three areas that must be reformed agency-wide before FHA can do the work anticipated by the rescue plans. First, FHA must be given more flexibility to innovate with new products. Second, it must be given the authority and funding to invest in new technology. And finally, FHA must be given greater flexibility to manage its human resources.

In mid-April, more than 150 MBA members gathered in Washington, D.C., at MBA's National Policy Conference to be briefed on the legislative outlook for our industry and take the industry's message to Congress. Support for FHA modernization and opposition to bankruptcy cramdown were two of the top issues MBA members discussed in their meetings on the Hill.

During these conversations, MBA members urged Congress to focus on four items:

* Stabilizing the housing market through FHA modernization, oversight reform for the GSEs, and by using tax incentives to help stop the decline in home prices and provide affordable rental housing.

* Assisting borrowers and renters by quickly passing a viable "rescue" plan and allowing the state housing finance agencies to play a larger role through refinance programs and increased capacity.

* Preventing future problems by passing a uniform national anti-predatory-lending standard, requiring strong licensing standards, enhancing disclosures, ensuring accurate appraisals and fighting fraud against lenders.

* Doing no harm by not allowing bankruptcy cramdown or other actions to further destabilize the market, through increasing borrowing costs, promoting uncertainty or limiting the availability of credit.

MBA's 10-point Agenda to Stabilize the Housing Market can be found at www.mortgagebankers.org/files/mbasagendato stabilizethehousingmarket.pdf.

My guess is that you, as I do, get a lot of questions from friends and neighbors these days about what is going on in our industry. In this pervasive atmosphere of blame and condemnation, it is easy to forget what a remarkable role the real estate finance industry plays in this country. You remain the lifeblood of a system that pumps capital and prosperity from around the globe into every neighborhood in America.

There is no better homeownership system in the world, no better way to create wealth for families and no industry that I would be prouder to serve. Thank you for the work you continue to do during these challenging times.

You can stay abreast of all these legislative developments and lend your voice to MBA's advocacy efforts through the Mortgage Action Alliance, at www.mortgagebankers.org/advocacy/mortgageactionalliance.

Steve O'Connor is senior vice president of government affairs for the Mortgage Bankers Association (MBA) In Washington. D.C., He can be reached at [e-mail].