FDIC Proposes $50B Pay-Down Loan Program

The Federal Deposit Insurance Corp. has developed a $50 billion "pay-down" loan program to facilitate the restructuring of "underwater" mortgages and prevent 1 million foreclosures. If approved by Congress, the Treasury Department would make loans to borrowers to pay down the principal of the first mortgage by up to 20%. Mortgage investors participating in the program would pay Treasury's financing costs and interest on the Home Ownership Preservation loan for the first five years. After five years, the borrower would start paying principal and interest. To ensure repayment of the HOP loans, the first lienholders would subordinate their interests to the Treasury. This would ensure that the government is "paid off the top," FDIC Chairman Sheila Bair said, when there is a sale or refinance. She called it a "workable" plan that would make "unaffordable loans affordable." It would also avoid dealing with second lienholders. The loans could stay in the securitized pools and the servicer wouldn't have to get the second lienholder's approval for the restructuring, Ms. Bair told reporters.