To Stem Foreclosures, FDIC Chief Mulls Guarantees

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The Bush administration is reportedly considering a new program aimed at helping individual homeowners stay in their homes and avoid foreclosure. Sheila Bair, chairman of the Federal Deposit Insurance Corp., has told lawmakers the government should provide loan guarantees as an incentive to get loan-servicers to modify existing mortgages.

MELISSA BLOCK, host:

From NPR News, this is All Things Considered. I'm Melissa Block. In the beginning, the government's $700 billion rescue package was aimed at buying up mortgage-related securities gone bad. Then the attention shifted to buying up equity stakes in banks. Now the focus is turning to homeowners facing foreclosure. The Senate Banking Committee took up the matter today. And all of those present, including Sheila Bair who heads the Federal Deposit Insurance Corporation, agreed much more needs to be done to get lenders to rework troubled loans. NPR's Yuki Noguchi has our story.

YUKI NOGUCHI: Sheila Bair's agency insures bank deposits, not mortgages. But she's outspoken about saying that government should put its money behind stemming the spike in foreclosures.

Ms. SHEILA BAIR (Chairman, Federal Deposit Insurance Corporation): We need to prevent unnecessary foreclosures, and we need to modify loans at a much faster pace. Preventing unnecessary foreclosures will be essential to stabilizing home prices and providing stability to mortgage markets and the overall economy.

NOGUCHI: Everyone agrees it's urgent. Foreclosures depress home prices, creating a vicious cycle. But the question is how do you stop it? To date, government programs such as Hope for Homeowners have tried to get lenders to voluntarily come to the table and rework loans. The programs help borrowers on the brink of foreclosure negotiate lower payments with their lenders. But critics like New York Democrat Charles Schumer say voluntary programs lack teeth and haven't helped enough people keep their homes. And Bair agreed.

Senator CHARLES SCHUMER (Democrat, New York): Do you have any hope for a voluntary model? I don't.

Ms. BAIR: No. I think there - no, there needs to be a package of carrot-and-stick incentives. I agree with that.

NOGUCHI: One of the biggest complications is that loans aren't held by just one lender. Many home loans are packaged into bonds that can be held by hundreds of investors, so it's hard to get everyone to the table. But Bair held up IndyMac Bank as a model of how it can be done. That bank failed in July and has been run by the FDIC. By standardizing the process, Bair said the bank has since reworked 3,500 loans. She says that model could work nationally. And to get lenders to step up, she favors using some of the $700 billion rescue package to create loan guarantees. So that if a lender reworks a loan and it goes into default a second time, the government would be on the hook.

Ms. BAIR: And if economic incentives need to be provided to help make the economics of those work, then I think that is what we need to do.

NOGUCHI: Neel Kashkari is an assistant Treasury secretary administering the $700 billion rescue plan. He also testified before the banking committee and said he hoped to give guidelines on how loan guarantees would work within several weeks. But he added there are many things that make modifying loans difficult.

Mr. NEEL KASHKARI (Interim Assistant Secretary of the Treasury for Financial Stability): The hardest part about a loan modification is not the calculation. A first year finance student could do the calculus of which is better. It's getting to the homeowner. It's getting them to pick up the phone and call.

NOGUCHI: Peter Morici is a professor at the University of Maryland. He said it doesn't matter whether the government puts more money on the table to try to get mortgages reworked. The problem is so vast and complex that many, many homeowners are bound to fall through the cracks.

Dr. PETER MORICI (Professor of International Business, University of Maryland): The hard truth is more people are going to lose their homes than we are comfortable with politically.

NOGUCHI: Christopher Dodd, the Connecticut senator who chairs the banking committee, said he plans to draft legislation before the new year addressing how the government can help accelerate mortgage workouts. Yuki Noguchi, NPR News, Washington.

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FDIC Chief Eyes Guarantees To Stem Foreclosures

FDIC Chairman Sheila Bair on Thursday suggested that the government guarantee mortgages as a means of avoiding foreclosures, a move that could help banks and homeowners.

Bair told the Senate Banking Committee that the Federal Deposit Insurance Corp. is working with the Treasury to establish standards for modifying loans and providing guarantees for loans that meet the standards.

"By doing so, affordable loans could be converted into loans that are sustainable over the long term," she told lawmakers.

Meanwhile, former Federal Reserve Chairman Alan Greenspan, who testified before a House panel, predicted the financial crisis would get worse before it gets better. Greenspan described the crisis as a "once-in-a-century credit tsunami."

Foreclosures Up Sharply

Earlier in the day, a new report showed that homeowners are, indeed, in need of help. U.S. foreclosure filings soared 71 percent in the third quarter compared with the same period in 2007, data released by RealtyTrac Inc. showed.

Nearly 766,000 homes across the country received at least one foreclosure-related notice from July through September. RealtyTrac experts predicted that more than 1 million bank-owned properties will be on the market — about a third of all properties for sale in the U.S — by the end of the year.

California, Florida, Arizona, Ohio, Michigan and Nevada accounted for more than 60 percent of all foreclosure activity in the quarter, with California alone making up more than a quarter of all foreclosure filings.

The huge number of foreclosures and the resulting credit crisis also had an impact on home prices. The Federal Housing Finance Agency's House Price Index released Thursday showed that home prices fell 5.9 percent for the 12 months that ended in August, along with a cumulative decline of 6.5 percent since prices peaked in April 2007.

As the worsening economic crisis has seen revenues plummet, many companies have also announced layoffs. Goldman Sachs Group Inc. announced Thursday that it will reduce its workforce by 10 percent, or 3,200 jobs.

Jobless Benefit Claims Remain High

Greenspan warned Congress more layoffs are likely — a fear borne out by new jobless figures released Thursday.

The Labor Department reported that jobless claims increased by more than expected last week as companies cut jobs owing to the slowing economy.

The department said new applications for unemployment benefits rose 15,000 to a seasonally adjusted 478,000, slightly above analysts' estimates of 470,000.

The total indicates that labor markets remain weak as companies lay off workers and cut back on hiring. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 333,000, the department said.

Greenspan Criticizes Banks

As bad economic news continued to be released during the day, federal regulators testified on Capitol Hill.

Greenspan told the House Oversight Committee that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.

Treasury Interim Assistant Secretary Neel Kashkari, Housing and Urban Development Assistant Secretary Brian Montgomery, Federal Reserve Gov. Elizabeth Duke and Federal Housing Finance Agency Director James Lockhart were also set to testify about the economic crisis before the Senate Banking Committee on Thursday.

From NPR and wire reports

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