Federal Mortgage Aid Plan: Necessary Cushion?

October 31, 2008 05:34 PM
by Anne Szustek
The FDIC and Treasury are in negotiations on a $600 billion package to guarantee mortgages and in turn, perhaps spur lending.

New Aid Plan in the Works

The $600 billion mortgage package would protect as many as 3 million homeowners from foreclosure by guaranteeing the loan against default.

The package, which would be administered by the Federal Deposit Insurance Corp. (FDIC), would open up a lending facility accessible by banks, hedge funds, investment funds, savings and loans, and other mortgage originators. Reuters writes that the arrangement “would encourage lenders to rewrite the distressed mortgages, converting them into affordable plans.”

Under the program, the newly available liquidity would give the lenders more space to allow income-sensitive repayment plans. The plan would make sure that mortgage payments would not exceed a certain percentage of income—perhaps 38 percent, as is the case under the FDIC’s payment structure for failed bank IndyMac.

Other possibilities under the program include extended payment periods and lower interest rates. Lenders that would choose to participate in the FDIC-backed program would get repayment guarantees from the government in the event they go into default.

Federal authorities are tight-lipped as to the exact details of the deal, which is not likely to be unveiled before next Tuesday’s election.

FDIC spokesperson Andrew Gray told The Washington Post that while the organization has “had productive conversations with Treasury about the use of credit enhancements and loan guarantees, it would [be] premature to speculate about any final framework or parameters of a potential program.”

Sources told The Washington Post that the White House is unenthusiastic about the mortgage plan, however. Tony Fratto, a spokesman for President Bush, was quoted as saying, “We have been reviewing a number of housing proposals for some time. …Any inference that we’re ‘nearing’ a decision on any one of them is simply wrong.”

Opinion & Analysis: Mortgage bailout program: solution or punishment?

Politicians from both sides of the aisle have come out in strong favor of some sort of government-backed mortgage program, if not the one currently under negotiations by the FDIC and Treasury. GOP presidential candidate John McCain proposed a plan while campaigning that would see the government issue its own fully guaranteed mortgages, rather than burdening private lenders with potentially risky loans.

Senate Banking Committee Chair Sen. Christopher Dodd, D-Conn., was quoted as saying in The Washington Post, “Federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes.”

Considering that the proposed FDIC mortgage plan is only responsible for defaulted loans, in the end it may only wind up costing taxpayers some $40 billion to $50 billion. Yet its detractors say that the plan in effect rewards those who took a loan they could not afford, while those who have made their scheduled mortgage payments get slapped with the tax bill.

“Why am I being punished for having bought a house I could afford?” asked Norwich, Conn., pilot Todd Lawrence in The New York Times. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.” As is the case with millions of other homeowners across the nation, his home has dropped in value, and he owes more on his house than it is worth.

Federal officials are quick to point out that the mortgage relief package is not a gift but an attempt to help keep up the value of real estate. Homeowners applying to the program will also have to prove that they did not purposely default on their mortgages.

Michael H. Krimminger, a special adviser for policy at the FDIC, told The New York Times, “This is not about trying to create fairness. … The goal is to keep people in their houses.”

When a home gets foreclosed, property values take a one-two punch. When banks own homes, they perform minimal upkeep on the real estate, and when the house finally does get sold, it is at such a low price that it sets a new minimum for the rest of the neighborhood.

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