FDIC’s Bair pushes aggressive mortgage plan

In a surprise move, FDIC Chairwoman Sheila Bair unveiled on Nov. 14th details of her plan to have the government help delinquent homeowners. There are two key elements to the proposal.

First, housing payments for delinquent borrowers two months or more late would be reduced to 31 percent of gross monthly income. To get there, mortgage rates could be set as low as 3% for five years, before increasing at an annual rate of 1 percentage point until they hit the prevailing market rate. Loan terms could be extended as long as 40 years.

Second, to encourage servicers and investors to participate, the government would share up to 50 percent of the losses if a borrower who had been helped ended up in default anyway. The risk of re-default had been one obstacle to getting lenders on board with systematic modification plans. In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan.

The plan is expected to initially help 2.2 million borrowers get new loans; after some borrowers re-default, 1.5 million would ultimately keep their homes, the FDIC estimated. The plan would cost an estimated $24.4 billion, which Bair has said could come from the $700 billion bailout Congress approved last month.

Unless Bair’s proposal gets the Treasury Department’s blessing, it would have to be approved by Congress or wait for review by the Obama administration.

Source: CNNMoney.com

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