The government's takeover of mortgage finance companies Fannie Mae and Freddie Mac should provide an opportunity to modify more home loans for troubled borrowers, a top government official said Wednesday.
The takeover, announced earlier this month, will allow regulators to "take a look at the loans and see what can be modified," said Sheila Bair, chairman of the Federal Deposit Insurance Corp., in testimony before a House committee.
With 1.5 million foreclosures last year and 1.2 million already in the first six months of this year, the foreclosure crisis is accelerating, she said.
"There are still a lot of mortgages out there that need to be restructured and families that can still be helped," Bair told the House Financial Services Committee.
Under her stewardship, the FDIC has rolled out a plan to help refinance delinquent homeowners into 30-year mortgages with interest rates currently capped at 5.9 percent. The FDIC introduced the program about a month ago after it seized IndyMac Bank.
Some lawmakers want to see if the program can be replicated among loans held by Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac bought loans from IndyMac, Washington Mutual and many other banks as part of their official role in supporting the housing market. But the government-sponsored companies ran into trouble when those loans started defaulting at an alarming pace, scaring off investors and putting upward pressure on interest rates.
Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency "actively looking" at expanding loan modifications among the more than $5 trillion in loans that Fannie and Freddie own or guarantee, Bair said.
Her efforts have the backing of the committee's chairman, Rep. Barney Frank, D-Mass.
"We will be urging others to follow your model," Frank told Bair. "I think you are setting a very good example here."
More than 1,200 homeowners with mortgages from failed IndyMac Bank are participating in the agency's effort to refinance the loans and stem the tide of foreclosures — a number is expected to rise dramatically.
So far, the FDIC has mailed out more than 7,400 offers to modify loans, and participating borrowers have saved an average of $430 on their monthly payments. The agency estimates that about 40,000 of IndyMac's 60,000 delinquent mortgages are eligible for the program.
The agency has been operating the Pasadena, Calif.-based bank, now called IndyMac Federal Bank, under a conservatorship since July 11.
And there are concerns on the FDIC might get saddled with an even bigger problem: Washington Mutual Inc., the nation's largest savings and loan.
To avoid that, the government has been reaching out to large banks in an effort to organize a buyout of the beleaguered lender, according to a person briefed on the talks between regulators and banks.
Shares of Washington Mutual have plummeted in recent weeks amid continued concerns about mounting losses in the bank's lending portfolios. The lender lost $3.33 billion, or $6.58 a share, in the second quarter and set aside more than $8 billion to cover souring loans.
Earlier this summer President Bush signed a bill that aims to prevent foreclosures by allowing an estimated 400,000 homeowners to swap their mortgages for more affordable loans, but only if their lender agrees to take a loss on the initial loan. That program starts Oct. 1, but some lawmakers are questioning whether that program will do enough to stem the foreclosure crisis.
"Voluntary may just not be good enough" said Rep. Jackie Spier, D.-Calif.
Executives from Citigroup, JPMorgan Chase and Bank of America and Wells Fargo, all told lawmakers they are boosting their staff and making preparations to put the new program in place. Bank of America and Wells Fargo officials said they are postponing foreclosure sales for customers who may qualify for the government-backed refinancing effort.