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In a surprise move, FDIC Chairwoman Sheila Bair Friday unveiled details of her plan to have the government help delinquent homeowners.
The proposal would have the government share up to 50% of the losses if the homeowner re-defaulted on the modified loan.
The plan is expected to initially help 2.2 million borrowers get new loans; after some borrowers re-default, 1.5 million would ultimately keep their homes, the FDIC estimated.
It would also pay servicers $1,000 to adjust the loan so that monthly payments were as low as 31% of a borrower's income.
The plan would cost an estimated $24.4 billion, which Bair has said could come from the $700 billion bailout Congress approved last month.
"It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures," the Federal Deposit Insurance Corp. said in a statement Friday. "A loss share guarantee on re-defaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale."
Bair's move Friday sets up a public power struggle not often seen within an administration.
The FDIC chairman has long pushed for the government to take a more active role in helping troubled homeowners. She initiated a similar plan at IndyMac, one of the largest mortgage lenders, after the agency took it over in mid-July.
Bush administration officials, however, have resisted her efforts, instead unveiling a plan Tuesday to streamline modifications of loans held or guaranteed by Fannie Mae and Freddie Mac.
Though he praised Bair's proposal, Treasury Secretary Henry Paulson Wednesday said it was one of several under discussion. Bair supporters took that to mean the plan was essentially dead.
Congressional Democrats, however, have continued to press for increased assistance to homeowners. They have publicly backed Bair, which could give her proposal the support needed for adoption.
"[The Fannie/Freddie plan] should not be considered a replacement for the guarantee program authorized by the recently-enacted financial rescue law which the FDIC has agreed to operate," Sen. Christopher Dodd, D-Conn. said Tuesday, after the mortgage finance plan was announced.
"We are still awaiting agreement from the Treasury Department to move this program forward, despite indications given to me weeks ago that an agreement was imminent. I have been in contact with both Secretary Paulson and Chairman Bair on this issue, and I intend to keep pushing for more aggressive and effective action."
Backstopping loan modifications
Borrowers who are at least 60 days late on payments would qualify for this program.
Servicers would have to systematically review all the loans in their portfolios to determine whether they would recover more value by modifying the mortgage rather than foreclosing on the home.
Loans would be adjusted by reducing the interest rate, extending the term or deferring part of the principal to the end of the mortgage.
But unlike some other government programs, the FDIC proposal would not reduce the principal to bring it in line with the home's current value. Some consumer advocates consider principal reduction key to assisting borrowers in areas where property values have plummeted, leaving many with mortgages greater than their home's worth.
Under the Hope for Homeowner program implemented last month, mortgages would be written down to 90% of the home's current market value and borrowers would be refinanced into 30-year fixed-rate mortgages insured by the Federal Housing Administration.
The FDIC's program, on the other hand, would not be as beneficial for so-called underwater homeowners. For situations where the mortgage is worth more than the home, the government's loss-sharing arrangement would gradually decline to 20% before ending for homes where the loan-to-value exceeds 150%. The loss-sharing arrangement would last for eight years.
