The U.S. government may start guaranteeing the mortgages of some homeowners who are heading for default, in hopes of convincing lenders to renegotiate the terms of troubled loans and avoid more foreclosures, Federal Deposit Insurance Corp. chairman Sheila C. Bair said today.
Bair told the Senate Banking Committee that the recently approved economic bailout package included authority for the Treasury Department to offer government loan guarantees and other incentives as a way to encourage banks and mortgage lenders "to prevent avoidable foreclosures."
There has been a "failure to effectively deal with" the mortgage foreclosure problem, Blair said.
The FDIC chairman has argued that the extensive set of financial rescue strategies deployed in recent weeks needs to do more to get at what she called the "root cause" of the crisis -- millions of households heading for default on their mortgages and potentially foreclosure on their homes.
Falling home values have been a key part of the dynamic. Some
families took out loans with adjustable or low introductory rates,
convinced that rising home values would let them refinance or sell
before higher interest rates kicked in. When home values fell and
credit markets froze, those same homeowners found themselves owing more
on the property than it was worth, unable to refinance or cover their
loan through a sale.
Bair said new efforts to stem foreclosure are needed, even if it means the Treasury offering to absorb losses on some soured mortgages.
"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."
Questioned by Sen. Chris Dodd (D-Conn.) as to whether the FDIC has the capacity to handle such a program, Blair said the Treasury Department would be in charge, and the FDIC would act as a contractor to help guarantee loans.
One big hurdle for private mortgage companies looking to restructure loans is that no industry-wide framework has been established to guide the process. "They've been doing it ad-hoc," Blair said.
Neel Kashkari, the interim head of the government's $700 billion rescue effort, said the Treasury Department is still in the "policy process" of figuring out how the program would work.
Bair said the program would be short-term, with federal assistance ending June 30. The temporary nature of the program, she said, is the key to preventing private banks from depending on federal help for all of loans.
Kashkari said the restructured loans would be handled by the banks themselves, but with "very specific instructions consistent with our objectives."
Although the program is first focusing on the residential housing market, there is a possibility it could be extended to the commercial real estate market as well, officials said.
Dodd emphasized a sense of urgency. "There are more than 10,000 foreclosures a day," he said. "I hope there's a deep appreciation that we need to get this moving."
Also today, RealtyTrac reported that U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier, reaching the highest on record. A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most since records began in January 2005.
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