Obama's Default Plan

Washington-President-elect Barack Obama is determined to find a way to address the foreclosure crisis as part of an economic recovery and stimulus plan that he wants Congress to pass shortly after he takes office on Jan. 20.

Last week, Mr. Obama selected key members of his economic team, including Timothy Geithner as Treasury secretary, who will be working on an economic plan to get credit moving again and address the growing foreclosure crisis.

The plan is likely to cost $500 billion to $700 billion and include funding for infrastructure projects and the auto industry.

Mr. Obama said at a press conference that he plans to release an overview of the plan in the next few weeks.

Mr. Geithner is currently the president of the New York Federal Reserve Bank and he has been working with Treasury secretary Henry Paulson in propping up Citicorp and American International Group.

“We will honor commitments made by the current administration,” Mr. Obama said.

The president-elect also plans to nominate former Harvard University president and Treasury secretary Lawrence Summers to be his chief economic advisor in the White House.

“We need a recovery plan for both Wall Street and Main Street,” Mr. Obama said, “a plan that stabilizes our financial system and makes credit flow again while at the same time addressing our growing foreclosure crisis, helping out the struggling auto industry and creating and saving 2.5 million jobs.”

The Obama team will not have to look far for ideas on how to address the foreclosure crisis. And one proposal developed by the Federal Deposit Insurance Corp. has become very popular among Democratic lawmakers.

Congressional Democrats have been urging Secretary Paulson to use part of the $700 billion Troubled Asset Relief Program to fund loan guarantees as a way to facilitate streamlined loan modifications, including troubled loans in securitized pools.

FDIC chairman Sheila Bair claims a loan guarantee program could help 1.5 million homeowners avoid foreclosure by the end of 2010 at a cost of $24 billion.

The borrower’s monthly payment would be reduced to 31% of their monthly income and servicers would be paid $1,000 after the borrower makes six payments. The federal government would cover up to 50% of losses if a modified loan subsequently defaults.

The chairman recently released details of the federal loan guarantee plan after Treasury officials rejected it.

This rejection irked House Democrats who accused Treasury officials of “abandoning” Congress’ mandate to use part of the TARP fund to prevent foreclosures.

Secretary Paulson indicated there are problems with the FDIC proposal. And he noted that Fannie Mae, Freddie Mac and Hope Now servicers have adopted a streamlined loan modification approach that was also developed by the FDIC.

But House Financial Services Committee chairman Barney Frank, D-Mass., argued that such initiatives are not a “substitute” for developing a TARP foreclosure reduction program. And he urged Treasury to reconsider the FDIC plan.

Democrats on the Senate Judiciary Committee also expressed support for the FDIC loan guarantee plan during a hearing on allowing bankruptcy judges to modify loans.

There has been a “succession of voluntary programs like Hope Now and Hope for Homeowners, and yet nothing has been successful in fighting foreclosure on the scale that is required across America,” said Sen. Dick Durbin, D-Ill.

The assistant majority leader went after the Mortgage Bankers Association for opposing his bill to allow bankruptcy judges to modify loans while servicers do little to prevent foreclosures.

MBA chairman David Kittle told Sen. Durbin that the industry is making progress in modifying mortgages. “We would like to see more,” he said.

The mortgage banker noted that MBA is supportive of the FDIC’s loan guarantee program. “We look forward to working with Sheila Bair of the FDIC on her proposal. We think it has merit,” he testified.

However, allowing homeowners to file for bankruptcy will provide false hope, Mr. Kittle warned, because two-thirds of filers are likely to end up losing their homes.

Sen. Durbin also noted his support for the FDIC plan and his expectation that Congress will pass a bankruptcy bill. “Change is coming to Washington. I am confident that early next year we will be able to take effective steps to finally address the economic crisis where it started " by helping families save their homes,” the Illinois senator said.

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