WASHINGTON/NEW YORK -- The Federal Deposit Insurance Corp proposed 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.
FDIC Chairman Sheila Bair said the program, which would need congressional action, seeks to strike a right balance to provide an incentive for investors to restructure the loans.
"It's a voluntary program," FDIC Chairman Sheila Bair told reporters during a conference call.
The Treasury Department did not have an immediate comment on the FDIC plan.
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The FDIC plan would help address the growing problem of negative equity, or where borrowers owe more than their homes are worth. Falling home prices will likely push 53 percent of all properties financed by subprime mortgages below the loan balance by year-end, and to 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 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.
"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 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 statement that highlights criticisms of how slow recent government-backed industry programs to help struggling homeowners have been.
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.
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.
"We do think 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 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 a mortgage bill sponsored by Barney Frank, a senior House Democrat, are "enormous impediments" to servicers and investors whose participation is essential.
Frank, of Massachusetts, said he could see some good in the FDIC proposal but that 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.
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