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Treasury, FDIC Near Deal on Mortgage Aid
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Aware that how they define homeowner eligibility could cause a political furor, negotiators have struggled to come up with parameters that would be considered fair, a banking industry source said.
One model could be the program the FDIC created after it took over IndyMac, a bank that failed after having made billions of dollars in risky mortgage loans.
IndyMac works with any borrowers who are delinquent or in default on their loans or at risk of becoming delinquent. The goal is to change mortgage terms so borrowers must pay no more than 38 percent of their income to cover their mortgage costs, including principal, interest, taxes and insurance.
Under the IndyMac program, a homeowner is excluded if the costs of reducing the loan payments exceed the costs of simply foreclosing on the home.
The financial crisis has prompted calls from a wide range of economic interests. Financial guarantee companies, for example, insure $1.4 trillion in state and municipal bonds, as well as $900 million in corporate and other debt.
When backed by the bond insurance that these outfits offer, a company or local government can borrow money more cheaply.
But the financial crisis has strained their balance sheets, and Moody's rating service says MBIA and Ambac Financial Group, the two largest in the industry, are "on review for downgrade."
Citing the possibility of a "systemic implosion" if such companies fail, Ambac has asked that the Treasury support the industry by guaranteeing a portion of losses.
The industry's cause is being championed by New York Insurance Superintendent Eric R. Dinallo, who has spoken on its behalf in an interview on CNBC and in speeches. Without a robust bond insurance industry, he has argued, it would be even more difficult for state and local governments to raise money for capital projects.
Ambac expressed similar arguments in its letter to the Treasury.
"Support that helps to stabilize the U.S. financial guarantors will have an exponentially positive impact for several critical sectors of the U.S. economy," Ambac's letter said.
The Treasury is also facing pressure to allow foreign banks to participate in its premiere program. While the legislation authorizing the $700 billion rescue allows foreign banks to participate, the first rescue program defined by Treasury -- the so-called capital purchase program -- does not.
Under that program, the government is investing $250 billion in banks in exchange for preferred shares that initially pay 5 percent annually, giving banks a relatively cheap source of capital.
Other countries have adopted similar programs.
So why should foreign banks be allowed to participate?
"This is a global crisis," according to a letter from the Financial Services Roundtable to the Treasury. The organization represents large financial institutions, including some foreign banks such as UBS, Barclays, Union Bank of California, Citizens Bank and HSBC.
"These companies play a large role in the U.S. economy," said Scott Talbott, vice president of the organization. "They have U.S. employees, they lend to U.S. taxpayers to pay for U.S. homes."
