Treasury Considers Backing Mortgages

By Peter Whoriskey and Zachary A. Goldfarb
Washington Post Staff Writers
Friday, October 24, 2008

The federal government may start guaranteeing home mortgages to persuade lenders to ease the monthly financial burden on struggling homeowners, Federal Deposit Insurance Corp. Chairman Sheila C. Bair said yesterday.

The proposal, presented to the Senate Banking Committee, represents the most detailed idea yet on how the $700 billion federal rescue package might directly address the blight of foreclosures sweeping the nation.

While the federal government has adopted a series of unprecedented measures in recent months to guarantee the investments and transactions of financial firms, the FDIC's proposal would vastly expand the role of the Treasury in standing behind the mortgages of struggling borrowers.

The plan, which won a warm reception from some senators, comes as demands grow on Capitol Hill for an ambitious initiative to help distressed homeowners, whose ailing mortgages are at the root of the financial crisis. The committee hearing yesterday continued a long-standing debate between lawmakers and the administration over how much to aid these borrowers. Citing the mortgage troubles of their constituents, some members of the Senate committee repeatedly complained that the administration has overlooked homeowners while placing emphasis on helping banks.

"In the month of August, over 9,800 homes entered foreclosure every day," Sen. Robert Menendez (D-N.J.) said. "If this statistic was that there were over 9,800 Wall Street executives that lost their jobs every day in August, we would have ended this a long time ago."

Sen. Christopher J. Dodd (D-Conn.), who chairs the Banking Committee, said he was encouraged after he spoke with Treasury Secretary Henry M. Paulson Jr. yesterday morning that Paulson wanted to provide some form of homeowner assistance.

Bair's loan guarantee plan is still being discussed by Treasury Department officials. Treasury officials who are leading the rescue effort have declined to say whether they would move forward with it, how much it would cost or even when they would make a decision.

The rescue legislation approved last month requires the government, as it acquires mortgages or mortgage-backed securities, to "implement a plan" to "maximize assistance for homeowners." The bill also requires the government to encourage lenders to adopt programs that minimize foreclosures. But the exact measures the government will take in that regard have not been disclosed.

The first $350 billion of the rescue package has been allocated to aid banks, not homeowners.

Under the program proposed by Bair, a lender would get a government guarantee that troubled loans would be repaid. In exchange, the lender would be required to significantly drop the interest rate, reduce the principal or extend the life of the affected loans.

Banks would apply to the FDIC to participate. A loan would be eligible for new terms if the borrower's income is high enough to meet the revised schedule of payments.

There has been a "failure to effectively deal with" the foreclosure problem, Bair said. "We're behind the curve."

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