FDIC wants US aid to pay down risky loans

Thu May 1, 2008 6:03pm EDT
 
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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.  Continued...

 

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