Treasury Considers Backing Mortgages
FDIC Proposal Aims to Help Homeowners

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."

The predicament facing borrowers is underscored by increasingly bleak foreclosure statistics. The firm RealtyTrac reported yesterday that there were 765,558 foreclosure filings in the third quarter, up 71 percent from the third quarter of 2007.

"Now that the administration has taken strong measures to stabilize financial institutions, it is imperative that we apply the same sharp and urgent focus to help the individual homeowners," Dodd said. "Their plight is at the root cause of this crisis."

Paulson has said that banks participating in the government's $250 billion emergency program to infuse capital into financial firms, announced last week, would be "encouraged" to avoid preventable foreclosures.

But even as banks are signing up, the Treasury has not defined how it will persuade participating lenders to ease up on homeowners. The program does not require banks to help homeowners, instead giving firms wide latitude in how they spend the money. They can even sit on it.

"Why aren't you insisting that they not hoard the money?" Sen. Richard C. Shelby (R-Ala.) asked.

Neel Kashkari, assistant Treasury secretary for financial stability, repeatedly sought to assure the committee that the department was keenly attuned to the troubles of homeowners faltering under the burden of mortgage debt.

He explained that the bank program doesn't require more of financial institutions because officials feared the firms wouldn't enroll if they had to adhere to many rules.

But the senators suggested that the banks that could profit from the program should be required to aid homeowners and accede to other government demands.

"We can no longer sit back and hope that lenders will do the right thing," Menendez said. "I do not believe Treasury is doing what's necessary" to make sure that lenders help homeowners.

Sen. Charles. E. Schumer (D-N.Y.) also said that the Treasury was giving the banks too much without requiring enough in return. "We're feeding them a little too much dessert and not feeding them enough vegetables," he said.

Asked by Dodd whether the FDIC had the capacity to handle the proposed loan guarantee program, Bair said that the Treasury would be in charge and that the FDIC would act as a contractor to help guarantee loans.

But when lawmakers repeatedly pressed Kashkari for details and deadlines, he said they were "studying" the idea. "We're looking at it very closely," he told the committee.

When Sen. Robert P. Casey Jr. (D-Pa.) pressed Kashkari about when the Treasury might make a decision, he responded, "Again, senator, I'm not trying to be evasive, but it's hard to predict the policy process."

Beyond the $700 billion rescue package, the government has launched other initiatives to help homeowners avoid foreclosure. But there's debate over whether they've worked.

Hope Now, an alliance of mortgage lenders organized by the Treasury Department last year, says it has helped 2.3 million homeowners avoid foreclosure.

But John Taylor, president of the National Community Reinvestment Coalition, said the alliance has "had a minimal impact compared to the magnitude of the problem." He said many of the actions Hope Now has taken involve allowing homeowners to temporarily stop making mortgage payments.

"It's postponing the foreclosure," Taylor said. "It's not ending it."

Several reports over the past few months have showed that only a fraction of homeowners facing foreclosure have received assistance.

Even the federal regulator in charge of running mortgage finance giants Fannie Mae and Freddie Mac, which together own about $1.5 trillion in mortgages and securities backed by mortgages, acknowledged at yesterday's hearing that the companies haven't done enough to stem foreclosures.

James B. Lockhart III, director of the Federal Housing Finance Agency, said only 49 percent of loans for which foreclosure was likely this year were modified to help the homeowner.

"They have to do a lot more," he said.

Staff writer Renae Merle contributed to this report.

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