Foreclosures: Feds to the Rescue?

The Federal Deposit Insurance Corp. and the Treasury Dept. are working on a major program to prevent widespread foreclosures that would include government guarantees of home mortgages.

The plan would use $50 billion from the recently passed bailout package to provide as much as $500 billion to $600 billion in government guarantees on up to 3 million at-risk mortgages. It might require banks and savings and loans to offer loans with lower interest rates for a five-year period, while shifting to the government any risk if the home doesn't recover its full mortgage value within that time.

Without giving details, FDIC Chairman Sheila Bair discussed the program on Oct. 29 at an international deposit insurers' conference in Arlington, Va. She said the agency has developed "a federal program to help more borrowers avoid foreclosure.…Such a framework is needed to modify loans on a scale large enough to have a major impact."

Bair said discussions are ongoing with the Treasury Dept., according to wire reports. The proposal could be out as soon as Oct. 30, says a lobbyist familiar with both elements of the plan and negotiations. However, a Treasury Dept. spokeswoman denied that a proposal is ready. "That is simply inaccurate," said Treasury spokeswoman Jennifer Zuccarelli. "We are looking at a number of proposals on foreclosure prevention, but no one proposal has been decided upon." Details of the plan the FDIC is pushing could change as Treasury—which has authority to administer most facets of the banking bailout—evaluates it. The lobbyist said there may yet prove to be friction with the White House over the plan, as well.

Not Enough?

A mandatory mortgage-relief program would be the government's boldest move on behalf of homeowners since the subprime crisis began picking up steam last year. Bair made a similar proposal six months ago, but it was dismissed without much discussion. Until now, a Bush Administration plan that was voluntary for banks has failed to spur enough loan modifications and prevent foreclosures.

Still, critics say that the five-year loan modification program could be putting off the inevitable for borrowers, and that the $50 billion committed to backing it up may not be enough to put a serious dent in the wave of foreclosures.

According to the lobbyist, the program would require banks, savings and loans, investment funds, hedge funds, and other holders of mortgages to restructure the loans based on a homeowner's ability to pay lower monthly mortgage payments. The government would guarantee a second loan on the home, so banks and other lenders would not lose any money in a mortgage modification. The homeowner would get lower payments for the five years. And if the homeowner defaulted and went into foreclosure anyway, the government would have to make good to whoever had issued the loan.