Why is the FDIC – a depository insurance arm of the Government – so concerned about staving off foreclosure? Why don’t they worry about staying solvent?
Reuters | 14 Nov 2008 | 12:56 PM ET
The Federal Deposit Insurance Corp Friday unveiled a plan to prevent about 1.5 million foreclosures by promising to share any losses with mortgage companies that agree to refinance certain home loans.
The plan would cost the government about $24.4 billion, which could be paid from the U.S. Treasury Department’s $700 billion bailout program, the FDIC said.
So far, most of the money in that program has been injected as capital into banks.
FDIC Chairman Sheila Bair, who spent weeks unsuccessfully lobbying Bush administration officials for the plan, issued the proposal two days after Treasury Secretary Henry Paulson dismissed the idea of the U.S. government underwriting failing home loans.
“That is a subsidy or spending program. The TARP was investment, not spending,” Paulson told reporters on Wednesday, referring to the Troubled Asset Relief Program administered by his department.
The FDIC pushed forward with its plan, posting it on the agency’s Web site on Friday morning.
“Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow,” the FDIC said. “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”
The FDIC, which insures most U.S. bank deposits, said its plan would modify about 2.2 million mortgage loans by offering financial incentives to mortgage servicers.
It would pay servicers $1,000 to cover expenses for each loan modified to the required standards, and would promise to share up to 50 percent of losses incurred if a modified loan redefaults.
Eligible borrowers would include those who have missed at least two monthly payments on loans for homes they live in.
Servicers would be expected to lower those borrowers’ monthly payments to about 31 percent of the borrowers’ monthly income.
The Treasury Department said Friday that it was “aggressively” looking at ways to reduce skyrocketing home foreclosures under the TARP.
“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 and maintaining the strength of our communities,” Treasury Interim Assistant Secretary Neel Kashkari said in testimony prepared for delivery to a U.S. House of Representatives committee.
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