Aggressive Foreclosure Rescue Plan Launched by FDIC’s Bair

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp. (FDIC) has unveiled her proposed foreclosure rescue plan that would include loan modifications to provide affordable mortgages to delinquent homeowners.

Under the plan, housing payments by homeowners who are due on their mortgages for more than two months would be reduced by at least 31 percent of their gross monthly income.

This would mean that mortgage rates would be set for as low as 3 percent for five years. It will then increase by 1 percentage point annually until it reach the current market rate. An option to extend loan terms up to 40 years is provided under the plan.

The foreclosure rescue plan provides for the U.S. government to absorb half of the losses incurred if a homeowner who had availed of loan modification, defaults again. This component of the plan is designed to encourage investors and loan service providers to join.

Furthermore, loan service providers would be paid $1,000 for every loan they modify.

The FDIC foreclosure rescue plan would not lower the principal to align it with the prevailing home market value. The plan would instead allow a portion of the principal loan to be deferred without any interest until the loan has been paid.

For borrowers who had refinanced or sold their properties before the debt was fully paid, they are required to pay out the principal loan or negotiate with banks to absolve their outstanding balance.

The plan is modeled after the IndyMac Bank’s loan modification program. Bank officials modified 5,000 mortgages and implemented interest rates modifications on 70 percent of cases.

The foreclosure rescue program is expected to cost $24.4 billion. Bair proposes to source the program’s funds from the government’s $700 billion financial bailout. FDIC believes the there is a need to offer incentives to encourage loan modifications to address the downward trend in housing market prices and stabilize the market.