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FDIC Says Pay-Downs Could Save a Million Loans.
Washington -- The Federal Deposit Insurance Corp. unveiled a bold $50 billion "pay down" loan program last month to facilitate the restructuring of underwater mortgages and potentially prevent one million foreclosures.
The FDIC proposal received fairly good reviews from House and Senate Banking Committee leaders. The Bush administration was dismissive, however, claiming it is focused on other legislative efforts to stabilize the housing market and increase the availability of mortgage credit.
FDIC chairman Sheila Bair said her proposal would turn "unaffordable mortgages into affordable mortgages" at very little cost to the government.
In addition, it would "complement" legislation Congress is working on to create a new Federal Housing Administration program to refinance underwater mortgages.
Under the FDIC proposal, the Treasury Department would make loans to borrowers to pay down the principal of the first mortgage by up to 20%. Participating mortgage investors are required to restructure the first mortgage into a fixed-rate fully amortizing loan with affordable payments.
The investors would pay Treasury's financing costs and interest on the Home Ownership Preservation Loan for the first five years. After five years, the borrower starts saving principal and interest over the remaining life of the newly restructured loan.
To ensure repayment of the HOP loans, the first-lien holder would subordinate their interests to the Treasury. This will ensure that government is "paid off the top," said Ms. Bair, when there is a sale, refinance or default.
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Source: HighBeam Research, FDIC Says Pay-Downs Could Save a Million Loans.