The Federal Deposit Insurance Corp. is proposing a plan to offer incentives to companies to reduce monthly mortgage payments for troubled homeowners.
FDIC Chairwoman Sheila Bair wants to dedicate a chunk of the government's $700 billion bailout fund to the proposal for reworking millions of mortgage loans. She tells Steve Inskeep that the restructuring would be similar to the FDIC's cleanup efforts after the failure of the California bank IndyMac.
"We have been going through those [mortgages] systematically and restructuring them to provide an affordable payment," Bair says. "First of all, everybody pretty much gets the same type of modification — we use a combination of interest-rate reductions."
If that's not enough, Bair says, then the amortization of, for example, a 30-year loan will be extended to 40 years to lower the monthly payment. And if that's still not enough, "then we will also forbear principal. We won't eliminate the principal. ... It's permanently deferred unless you refinance or sell the house."
Bair says the FDIC has followed this protocol to modify about 5,000 loans so far, with several thousand more to go. To expand the system to the millions of loans in trouble across the country, Bair has proposed giving companies financial incentives.
"Specifically, we're proposing that if servicers modify a loan to this IndyMac protocol, the servicer will get $1,000 for each loan modification. And then, if the loan is modified but it still defaults later on, the government will share up to half of the losses on that re-default," Bair says. "So we think we can get about 2.2 million loans modified. It would be at a cost of about $25 billion."
The FDIC is proposing that the program last through 2009. "The government is getting something in return for this, which is keeping these houses off the foreclosure rolls. Because these escalating foreclosures [are] creating more and more downward pressure on home prices, which is having a very negative impact on our economy," Bair says.
While the program may help some people who knowingly took out mortgages they couldn't afford, Bair says, "Why take a punitive step of forcing them into foreclosure? You're going to have another empty house sitting on the neighborhood for over a year. Who does that help? I don't think that helps anyone."
As for the people who were careful not to get in over their heads and would have to watch while their neighbors get help with their payments, Bair says, "I think that I would say to those neighbors ... I want my neighbor's mortgage fixed because, yes, I do have some compassion for that person, but I also realize that it's in my economic self-interest to get this situation stabilized. This relentless procession of foreclosures is creating havoc with our housing market and we need to get it stabilized."
The FDIC proposal, however, is running into resistance from Treasury Secretary Henry Paulson, who has said he sees the bailout fund as money for investing in loans or buying stock in companies, not for use on spending programs.
But Bair says the proposal isn't dead. "I think we're still talking. I think he didn't close the door completely. And I think he's actually, in terms of the substance of the program, I think he's quite supportive. It's just where the money comes from is really the issue we're debating."