FDIC wants US aid to pay down risky loans

By John Poirier and Al Yoon

WASHINGTON/NEW YORK (Reuters) - The Federal Deposit Insurance Corp proposed on Wednesday a government plan that would allow about 1 million homeowners to pay down as much as 20 percent of the principal on mortgages that are deemed unaffordable.

The program would create a new smaller mortgage and a "Home Ownership Preservation" loan, the FDIC said in a statement.

It is the latest in a series of foreclosure prevention plans offered by regulators and lawmakers, including a bill that expands the ability of the Federal Housing Administration to refinance risky mortgages. The FDIC's program could help borrowers, but it requires legislation and may be too late to supplement the pending bill, Goldman Sachs economists said.

FDIC Chairman Sheila Bair told reporters during a conference call on Wednesday that the program seeks to incent investors to restructure the loans.

Chairman Bair "has on occasion advocated more aggressive proposals than others in the Bush Administration," the Goldman Sachs economists wrote in a research note. "Sometimes these are embraced, sometimes they are not."

The FDIC plan would help address the growing problem of negative equity, in which borrowers owe more than their homes are worth. Falling home prices will likely push 53 percent of all properties financed by subprime mortgages below their loan balances by year end, and affect nearly two-thirds in 2009, according to Credit Suisse research.

Credit Suisse estimates lenders will foreclose on 2.8 million U.S. homes over the next two years as borrowers fall behind on their payments and real estate prices crumble.

Under the FDIC plan, investors who own the mortgage would pay the first five years of the interest on the Housing Ownership Preservation (HOP) loan. Borrowers would be responsible for payments after that, said the FDIC, which insures deposits for U.S. banks.

The funds for modifying home loans that were deemed "unsustainable at origination" could come from a Treasury debt offering of $50 billion, it said. The program is voluntary.

"Today's proposed Home Ownership Preservation plan is an attempt to put mortgage servicers and homeowners in debt to the federal government as a way to rescue homeowners," said Nicholas Bratsafolis, chief executive officer of Refinance.com, an online lender that has developed its own plan to capture lost equity with a second loan.

The Office of Thrift Supervision, which largely regulates mortgage lenders, has also proposed a plan that would provide negative equity certificates as an incentive to recoup current losses at a later date.

Congress could wrap up a package of mortgage and housing proposals this summer and send it to President George W. Bush by early July.

"Only the federal government is in a position to help arrest the downward cycle in housing markets," the FDIC said in a statement that highlights criticisms of how slow recent government-backed industry programs to help struggling homeowners have been.

A Treasury Department spokeswoman said Bair's work is appreciated but the focus should be modernizing the FHA and reforming government-sponsored mortgage finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Bair, whose agency would administer deposit insurance if a bank fails, has been a leading advocate of helping distressed homeowners and was calling for loan modifications long before other regulators and lawmakers. Her plan is worthy of Congress' serious consideration, said Senate Banking Committee Chairman Christopher Dodd, of Connecticut.

The FDIC plan would apply only to mortgages for owner-occupied residences originated between Jan. 1, 2003, and June 30, 2007, and those that do no meet federal mortgage guarantee program criteria.

Servicers, many of which are already affiliated with regulated banks, would also agree to periodic special audits by a federal banking agency under the plan.

"There should be some audit requirements to make sure the loans are being restructured," Bair told reporters.

Bair said the agency has not received any feedback from servicers and said staff are briefing members of Congress. She said the FDIC proposal is meant to supplement current loan modification programs.

But UBS Securities on Wednesday said the need for voluntary write-downs under the mortgage bill sponsored by Rep. Frank are "enormous impediments" to servicers and investors. The FDIC plan would leave credit risk on the investors, likely reducing their participation, Barclays Capital said.

Frank, of Massachusetts, said he could see some good in the FDIC proposal but said his immediate priority was to shepherd his Federal Housing Administration reform bill to forestall some foreclosures through Congress.

"We'll keep talking to her," he said of Bair.

(Additional reporting by Patrick Rucker and David Lawder; Editing by Diane Craft)