Alan Zibel
USA Today
A foreclosure sign in front of a home in Perris, Calif., in May — By Mark Avery, Reuters file
WASHINGTON — Publicly breaking with the Bush administration’s official stance, the Federal Deposit Insurance Corp. proposed Friday to use $24 billion in government financing to modify 2.2 million mortgage loans and help a projected 1.5 million American households avoid foreclosure.
The FDIC posted the plan on its website two days after Treasury Secretary Henry Paulson rejected the idea of using money from the $700 billion bailout of the financial industry to pay for such a proposal.
A Treasury spokeswoman declined comment Friday, but Interim Assistant Treasury Secretary Neel Kashkari told a panel of the House Oversight and Government Reform Committee that the Treasury Department is “aggressively” looking at ways to reduce skyrocketing home foreclosures under a $700 billion financial rescue program that so far has aimed at shoring up banks.
“We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications, which are a key part of working through the necessary housing correction,” he said.
Kashkari also said steps taken by both U.S. policymakers and overseas counterparts to ease the global credit crisis have had an impact. “Our system is stronger and more stable than just a few weeks ago,” he said.
Still, the Treasury’s chief official for confronting the housing crisis was scolded by lawmakers for doing too little to aid troubled borrowers.
“The Treasury Department has abdicated its responsibility to stem the tide of mortgage foreclosures,” said Rep. Dennis Kucinich, whose subcommittee hosted Kashkari. “They have passed the responsibility back to the private sector and inadequate government efforts.”
The FDIC’s plan would guarantee the 2.2 million modified loans — mainly risky loans made to borrowers with weak credit or small down payments — through the end of next year. Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.
“If we can avoid those foreclosures, then you will get more stability in the housing market,” said Michael Krimminger, a senior adviser to FDIC Chairman Sheila Bair, said Thursday.
The FDIC says the government’s backing will make the lending industry more willing to modify loans because taxpayers will absorb half of the losses if the borrower defaults again. Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.
Even if a third of borrowers default again on their modified loans, 1.5 million homes would still be saved, the FDIC says. Under the agency’s plan, monthly payments shouldn’t total more than 31% of homeowners’ pretax monthly income.
The FDIC says its plans should apply to an estimated 4.4 million loans that are likely to become delinquent though the end of next year. That estimate excludes loans held by mortgage finance companies Fannie Mae and Freddie Mac, which on Tuesday launched their own loan modification program modeled after the FDIC’s effort at failed IndyMac Bank.
The agency has been an aggressive proponent of efforts to alleviate the foreclosure crisis. FDIC officials sounded early warnings about a rise in defaults among risky loans, and have repeatedly reaped praise from Congressional Democrats.
After taking over failed IndyMac Bank of Pasadena, Calif., over the summer, the FDIC launched a loan modification plan in which borrowers receive interest rates of about 3% for five years. That plan was used as a model for a loan modification plan announced Tuesday by mortgage finance companies Fannie Mae and Freddie Mac.
Both of those plans reduce interest rates so borrowers aren’t paying more than 38% of their pretax income on housing expenses.