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FDIC plan could help 1.5 million keep homes

Publicly breaking with the Bush administration, the FDIC proposed to use $24 billion in government funding to help 1.5 million American households avoid foreclosure.
/ Source: The Associated Press

Publicly breaking with the Bush administration's official stance, the Federal Deposit Insurance Corp. proposed Friday to use $24 billion in government funding to help 1.5 million American households avoid foreclosure.

Where to find that money, though, is in dispute. FDIC officials want to use part of the $700 billion bailout of the financial industry to pay for it. But the Treasury Department is opposed to that idea.

Testifying on Capitol Hill Friday, Neel Kashkari, the Treasury Department's assistant secretary for financial stability, said the aim of the $700 billion plan was to make investments with the hope of getting the money back. That he said, was "fundamentally different from just having a government spending program" that would disburse money with no chance of ever seeing any returns.

With the Bush administration adamantly opposed, Congressional Democrats could take up the FDIC's plan when they return for a lame-duck session next week. Or the plan could set the stage for a new foreclosure prevention initiative once President-elect Barack Obama takes office in January.

At Friday's hearing, lawmakers complained that the Bush administration is ignoring the will of Congress and slighting homeowners on the verge of foreclosure in its latest approach to spend $700 billion in economic rescue money.

Congressional dissatisfaction is especially significant because Congress can block the release of the second half of the money, $350 billion, or put new conditions on its use. Democrats are pushing for funds to help the auto industry and distressed homeowners alike.

There is intense speculation in Washington that the FDIC's chairman, Sheila Bair, is positioning herself for a role in the Obama administration. "My assumption is that she's angling for a promotion," said Bert Ely, a banking industry consultant in Alexandria, Va. and an FDIC critic.

The agency's plan, posted on its Web site Friday, would guarantee 2.2 million modified loans — mainly risky loans made to borrowers with weak credit or small down payments — through the end of next year. Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

"If we can avoid those foreclosures, then you will get more stability in the housing market," said Michael Krimminger, a senior adviser to Bair in an interview Thursday.

The FDIC says the government's backing will make the lending industry more willing to modify loans because taxpayers will absorb half of the losses if the borrower defaults again. Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.

Even if a third of borrowers default again on their modified loans, 1.5 million homes would still be saved, the FDIC says. Under the agency's plan, monthly payments shouldn't total more than 31 percent of homeowners' pretax monthly income.

The FDIC says its plans should apply to an estimated 4.4 million loans that are likely to become delinquent though the end of next year. That estimate excludes loans held by mortgage finance companies Fannie Mae and Freddie Mac, which on Tuesday launched their own loan modification program modeled after the FDIC's effort at failed IndyMac Bank.

The agency has been an aggressive proponent of efforts to alleviate the foreclosure crisis. FDIC officials sounded early warnings about a rise in defaults among risky loans, and have repeatedly reaped praise from Congressional Democrats.

After taking over failed IndyMac Bank of Pasadena, Calif over the summer, the FDIC launched a loan modification plan in which borrowers receive interest rates of about 3 percent for five years. That plan was used as a model for a loan modification plan announced Tuesday by mortgage finance companies Fannie Mae and Freddie Mac.

Both of those plans reduce interest rates so borrowers aren't paying more than 38 percent of their pretax income on housing expenses.