UPDATE 1-Foreclosure bill opens US gov't to undue risks-FHA

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By Al Yoon

BOSTON, May 6 (Reuters) - Proposed legislation to expand the Federal Housing Administration's mortgage insurance program may be too far-reaching and open the government to undue risks, Federal Housing Commissioner Brian Montgomery said on Tuesday.

The U.S. House of Representatives Financial Services Committee chaired by Rep. Barney Frank last week approved a sweeping bill to enable the government to finance $300 billion in distressed mortgages to help two million homeowners avoid foreclosure.

An expansion of an FHA program already in place, called FHA Secure, would create fewer chances that taxpayers would foot the bill for the riskiest mortgages, Montgomery said during a panel discussion at a Mortgage Bankers Association conference.

"We are all trying to do the same thing ... but we want to make sure we are not doing it on the backs of the taxpayers," he said. The Frank plan "really throws the barn door open," he told a sparse crowd at the Boston MBA conference.

The mortgage industry continues to undergo a wrenching correction that has produced record rates of foreclosure and a downward spiral in home prices. The dire state of the market was palpable at the MBA's annual secondary markets conference, where attendance is off by more than 50 percent from 2007.

According to Frank, a Massachusetts Democrat, the new FHA program could cost the government up to $6 billion. Analysts at Citigroup calculated the Frank proposal could cost the government as much as $20 billion, but profits may reach $31 billion if homeowners do not re-default past expectations.

The FHA is central to foreclosure prevention programs since it has catered to low-income borrowers.