The Bush administration is weighing a roughly $40 billion proposal to help forestall foreclosures, one of a series of ideas under consideration designed to address the root causes of the financial crisis.
At a Senate Banking Committee hearing Thursday, Federal Deposit Insurance Corp. Chairman Sheila Bair is expected to suggest the government give banks a financial incentive to turn troubled loans into more-affordable mortgages, according to a person familiar with her testimony. Under the proposal, the government would share in any future losses on the new loans with lenders.
The Treasury Department, under pressure to act more aggressively to help homeowners, is discussing this option, people familiar with the matter say. It is also moving ahead with separate plans to use part of its $700 billion financial rescue fund to directly buy and renegotiate mortgages.
Treasury officials are slated to privately brief members of the House Financial Services Committee on their plans to assist homeowners, among other matters, Thursday afternoon. There are many ideas under discussion and it's not yet clear which will prevail.
Under Ms. Bair's idea, new mortgages would have to meet certain conditions to qualify for partial government backing. The list of criteria could not be learned. Previous government plans have required that owners live in their homes and be relatively up to date on their mortgage payments.
The options being considered come amid growing pressure from Democrats and both presidential candidates to step up efforts to prevent foreclosures. The government has made dramatic moves in recent weeks to thaw credit markets and restore confidence to the banking system, but hasn't matched that with similar moves to prop up the housing market.
Other possibilities include using mortgage giants Fannie Mae and Freddie Mac to bring down mortgage rates and insuring inexpensive reworked loans through the Federal Housing Administration. Under the terms of the language of the bailout bill, Treasury is obliged to use its new-found authority to help homeowners in danger of foreclosure.
Providing direct help to homeowners has proven to be a tough political and logistical challenge. The administration's scope for action has been limited by the fact that the vast majority of the most-troubled mortgages -- high-priced subprime loans given to the least-creditworthy borrowers -- have been sliced up and tucked into securities sold to a variety of investors. That makes renegotiating such loans a complex and onerous task.
Any new move could also be controversial, because it would likely give a helping hand to lenders who made bad loans and consumers who took them.
About 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, with 4.3 million of those losing their homes, according to Moody's Economy.com, a research firm. That default rate is almost triple the level during normal economic times and has myriad economic ramifications, including further depressing house prices.
This month, the FHA launched a $300 billion program dubbed Hope for Homeowners in which qualified borrowers who owe more to their banks than their homes are worth can get government insurance for a new loan, if the lender agrees to reduce the principal outstanding. The program has only been operational for a few weeks and no data are available.
Treasury Secretary Henry Paulson, speaking to the Public Broadcasting System this week, talked about the number of homeowners who were walking away from their mortgages. 'There is clearly more that can be done -- needs to be done,' he said.
Ms. Bair and others have prodded government officials recently to act more aggressively.
Renegotiating troubled mortgages -- as opposed to paying them off -- is difficult because most have been packaged into securities and sold off to multiple investors. Mortgage servicers -- companies that collect payments and work with homeowners -- typically act on behalf of those investors, who often have competing interests. Getting servicers to rework mortgages has been a tough slog for the government under its existing programs, which encouraged but didn't require industry compliance.
Ms. Bair's proposal is designed to overcome some of these problems by significantly raising servicers' incentives to cooperate. The government would agree to share a portion of any losses on a new, more-affordable mortgage, should it go into default. Mortgage servicers would have to rework the terms of the existing loan.
Another option available to the administration comes from the rescue fund granted by Congress, which is designed primarily to help stabilize teetering banks by directly investing capital and buying their toxic assets.
Still, many banks do have some bad mortgages on their books that haven't been securitized, which Treasury is considering buying. It's not clear exactly how many troubled mortgages fit into this category.
