FDIC Floats New Foreclosure Prevention Plan

Nov 21, 2008 - Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), released her agency’s plan to use $24 billion in government aid to assist over 1.5 million distressed homeowners avoid foreclosure.  Under the plan, mortgage loan servicers would be offered financial incentives to help shoulder the cost involved in modifying an existing mortgage loan.  An additional safeguard would be added by offering to share with the mortgage lender in any potential loss (up to 50%) on a loan which was modified if it were to ultimately go into default, thereby putting the taxpayers on the hook as well if the modification does not work as intended.  The plan would essentially guarantee over 2 million in modified loans through the end of next year.  Participating borrowers would receive a reduced interest rate or an extension of their loan term in an effort to make their current loan more affordable.   The plan comes as the result of frustration on the part of both homeowners and government agencies that the pace of loan modifications has not moved faster.  Loan modifications (in conjunction with mortgage balance write downs) are thought to be an effective solution to the problem of rising foreclosures and home price declines.    

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Borrowers eligible under the FDIC plan must occupy a home as their primary residence and have missed a minimum of two mortgage payments.  Additionally, participating loan servicers would be expected to reduce a distressed borrower’s monthly payment to approximately 31% of their gross monthly income.     The plan, if implemented as proposed, is anticipated to cost approximately $24 billion, which the FDIC would like to see come from the $700 billion in bailout funds allocated to the Treasury Department under TARP, the Troubled Asset Relief Program.  To date these funds have been used exclusively to shore up banks.  The Treasury Department’s stated goal under TARP is their expectation that these funds will ultimately be returned to the taxpayer and are not simply a massive government give away with no strings attached.  Therefore TARP is perceived as an investment rather than a spending plan by the Treasury Department.   We’ll see how things evolve as the next administration takes over.

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