FDIC Says Pay-Downs Could Save a Million Loans

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.

One critically important aspect of the FDIC plans is that it avoids dealing with second-lien holders. The loans can stay in securitized pools and the servicer doesn't have to get the second-lien holder's approval, Ms. Bair told reporters.

The HOP loans could "mitigate this downward cycle we are in now where we have all these unaffordable loans creating more foreclosures, creating more downward pressure on home prices," she said.

Senate Banking Committee chairman Christopher Dodd, D-Conn., said the FDIC proposal has "a lot of merit."

Sen. Dodd is working on an FHA refinancing bill that his committee is scheduled to mark up this Tuesday (May 6). He noted it is probably too late to include the FDIC proposal in the markup. "But I like the idea," he said during a CNBC-TV interview.

Along with the FHA refinancing bill, the Senate Banking Committee also is slated to mark up a GSE bill on Tuesday that strengthens regulation of the government-sponsored enterprises - Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Meanwhile, the House Financial Services Committee completed the mark up of its FHA bill and passed it last Thursday.

The bill provides FHA with $300 billion in loan commitments to refinance homeowners with underwater mortgages. This voluntary program offers investors/servicers the option to refinance underwater mortgages if they agree to write down the principal amount to 85% of the current appraised value.

Committee chairman Barney Frank, D-Mass., said the FDIC proposal is not a "substitute" for his FHA refinancing bill. But he said Chairman Bair has made another "important contribution to the debate" and encouraged her to continue to push the FDIC proposal. Meanwhile, the Bush administration opposes the FHA refinancing bill and Treasury secretary Henry Paulson has said several times that he does want the help of Congress in dealing with rising mortgage defaults and foreclosures.

When asked about the FDIC proposal last week, a Treasury Department spokesman said the administration has other priorities. "We think the focus right now should be on getting FHA modernization and GSE reform legislation across the finish line."

That statement came after President George Bush blasted Congress for failing to pass the FHA modernization and GSE reform bills after years of legislative shuffling. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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