FDIC's Bair Offers Plan For Reworking Mortgages FDIC Chairwoman Sheila Bair wants to dedicate a chunk of the government's $700 billion bailout fund to a proposal for reworking millions of mortgage loans. She tells NPR the restructuring would be similar to the FDIC's cleanup efforts after the failure of the California bank IndyMac.
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FDIC's Bair Offers Plan For Reworking Mortgages

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FDIC's Bair Offers Plan For Reworking Mortgages

FDIC's Bair Offers Plan For Reworking Mortgages

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Another plan to help homeowners comes from Sheila Bair. She leads the Federal Deposit Insurance Corporation. The FDIC has been cleaning up after the failure of IndyMac bank, and now Bair wants to rework the terms of millions of American mortgages, the same way the FDIC changed many of IndyMac's mortgages.

Ms. SHEILA BAIR (Federal Deposit Insurance Corporation): We have been going through those systematically and restructuring them to provide an affordable payment. First of all, everybody pretty much gets the same type of modification. We use a combination of interest rate reductions. If we can't get you an affordable payment that way, we will extend the amortization of your 30-year loan to 40 years.

INSKEEP: Oh, which lowers the monthly payment.

Ms. BAIR: Which lowers or - and if we can't get there, then we will also forebear principal. We won't eliminate the principal.

INSKEEP: We can put it off till later.

Ms. BAIR: Well, actually it's permanently deferred unless you refinance or sell the house. And we've done this, we've modified about 5,000 so far. We have several thousand more.

INSKEEP: But what are you doing? What is it that you want to do for millions of mortgages that must be out there?

Ms. BAIR: Well, we'd like to use this protocol, and we're proposing some financial incentives to get this done. Specifically, we're proposing that if servicers modify a loan to this IndyMac protocol, the servicer will get a thousand dollars 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. So we think we can get about 2.2 million loans modified. It would be at a cost of about $25 billion. We proposed 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 is creating more and more downward pressure on home prices, which is having a very negative impact on our economy.

INSKEEP: I just want to understand something here, though, because you're talking about now, if your proposal were accepted, renegotiating mortgages where somebody's spending about a third of their income on the mortgage every month. How on earth are you going to distinguish between the people who got in over their heads and were a little bit deceived by the persons who sold them the loan and those people who just made a conscious choice to buy a big house, and they're out there paying right now and suddenly you're going to let them off the hook for part of their payment?

Ms. BAIR: Right. Well you know, I think first of all, you'd have to be below the confirming loan limit so it wouldn't - for the super expensive houses, this program will not be available. And yes, there may be some who knew that they had an unaffordable mortgage and took it anyway and got into that house and you know what? Yes, you're right. They're going to be benefiting by this. But you know what else? 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.

INSKEEP: Although there are going to be people who they're making their payments every month and they're going to say why is my neighbor getting this break when he bought a house just like mine but he's going for help and I'm not?

Ms. BAIR: A couple of things. First of all, they're not going to get a break on their principal, OK? So there may be some forbearance on the principal. They're still going to have to pay off that principal to refinance or sell the house. Number two, these are people that got unaffordable mortgages. And what we're doing, we're just making the mortgage affordable.

INSKEEP: Although again, I can hear the complaint. I'm paying my affordable payment that I carefully structured and now my tax money is paying for my neighbor's.

Ms. BAIR: Yeah.

INSKEEP: You know, the third room in the house - whatever it is.

Ms. BAIR: Well, I think that I would say to those neighbors, you know what? I haven't had any problems, but 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 the situation stabilized. This relentless procession of foreclosures is creating havoc with our housing market, and we need to get it stabilized.

INSKEEP: One other thing. Treasury Secretary Henry Paulson, the guy who's got the money to spend, as you well know, has said this week, nice idea you have, but that is a spending program. That's giving away money, and Paulson doesn't see the bailout as giving away money. He sees it as investing by buying loans or buying stocks and companies, the taxpayers get to own something.

Ms. BAIR: Right.

INSKEEP: And that's why he doesn't think that your proposal fits the bailout.

Ms. BAIR: Right. Well, we have a very constructive - we're still talking with Treasury, and I've got a great working relationship with Secretary Paulson. And I've been very supportive, but we do disagree with him on that point.

INSKEEP: Is your proposal dead because Paulson said it's not a good idea?

Ms. BAIR: Well, I don't think it is 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.

INSKEEP: Sheila Bair, chairman of the FDIC. Thanks very much.

Ms. BAIR: You're welcome. Thank you.


As Bair's proposal suggests, the government is still changing how it will spend the $700 billion financial bailout package. Last night on NPR's All Things Considered, Treasury Secretary Henry Paulson was asked what Americans are getting for the $300 billion that's already been spent.

Secretary HENRY PAULSON (Treasury Secretary): I believe that the banking system has been stabilized. No one is asking themselves anymore is there some major institution that might fail and that we would not be able to do anything about it. So I think that is a positive. Let me tell you, it took a long time to build up these excesses, and it's going to take a good while to work through this period.

SHAPIRO: Treasury Secretary Henry Paulson, who still has another $400 billion to spend. This is NPR News.

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