FDIC Plan: U.S. Would Cover 50% of Losses on Loan Mods

The federal government would guarantee up to 50% of any losses on a modified loan that subsequently defaults under a proposal being promoted by the Federal Deposit Insurance Corp. The agency's effort is geared toward modifying 2.2 million non-Fannie Mae/Freddie Mac loans by the end of 2009. "Assuming a re-default rate of 33%, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion," the agency said Friday, revealing details about its plan. The Treasury Department, however, is refusing to back the agency's idea with any of the $700 billion allocated under the Emergency Economic Stabilization Act. Servicers participating in the FDIC program could receive $1,000 for successfully modifying delinquent loans once the borrower makes six payments. In restructuring a loan, the borrower's monthly payment must be reduced to 31% of monthly income. The 50% loan guarantee would apply to modified loans with loan-to-value ratios of up to 100%. "For LTVs above 100%, the government loss share would be progressively reduced from 50% to 20% as the current LTV rises," FDIC says. Modified loans with LTVs above 150% would not eligible for the program. Loan guarantees would expire after eight years.