Proposal Seeks Government Loans to Aid Homeowners

WASHINGTON -- Federal Deposit Insurance Corp. Chairman Sheila Bair is finalizing a legislative proposal that would allow the Treasury Department to make direct loans for close to one million homeowners in the latest government initiative to stabilize the slumping mortgage market, The Wall Street Journal reported Wednesday.

The plan would authorize the new government loans so that borrowers could pay down up to 20 percent of the principal they owed on their mortgage, according to a confidential draft of the plan obtained by the paper. That would mean that if a homeowner owed $100,000 on a mortgage, the government could loan up to $20,000 to pay down the principal.

"This approach is scalable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices," the draft said, the paper reported.

According to the draft, borrowers would still be required to pay their mortgage and the new government loan, but they would not have to make any payments on the Treasury loan for the first five years. During that time, investors in the loans would pay interest to Treasury, and after five years homeowners would begin repaying the Treasury loan at fixed Treasury rates, the paper reported.

For loans to qualify, mortgage investors would "pay Treasury's financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment."

To modify one million loans, the FDIC estimated it would require a $50 billion public debt offering. Treasury would recoup the costs because it would have the first priority to recover funds if homes are sold, refinanced, or if the borrower goes into default.

The plan would need to be approved by Congress, which is considering several other proposals to prevent foreclosures.

Meanwhile, The New York Times reported Wednesday that fewer than 2,000 homeowners at risk of foreclosure have been helped by a Federal Housing Administration (FHA) program that President Bush promised would help homeowners who had fallen behind on their mortgage payments, federal housing statistics show.

FHA officials have asserted in recent weeks that more than 150,000 people have benefited from the program, which was intended to help troubled homeowners refinance into stable, government-issued loans. But the vast majority of participants have been homeowners who have made their mortgage payments on time, not the borrowers in crisis who were the targets of the president’s plan, the paper reported citing statistics.

Housing officials, who initially expected that 60,000 or more delinquent borrowers would benefit, say they greatly overestimated the demand from troubled homeowners, the paper reported.

But they say the program, known as FHA Secure, has helped people who were anticipating difficulties in paying their mortgages. Such homeowners were able to refinance before they fell behind, officials say, according to the paper.

-- NYSSCPA.org News Staff

Posted on 5/1/08