FDIC Details Plan To Alter Mortgages

Treasury Opposes Using Bailout Funds For Proposal to Ease Monthly Payments

Officials at the Federal Deposit Insurance Corp. yesterday detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans.

The proposal, which has the support of leading congressional Democrats, would considerably expand the scope and force of the government's efforts to stem foreclosures. Agency officials estimated the cost to the government at $24.4 billion.

FDIC Chairman Sheila C. Bair continues to face opposition within the Bush administration. Treasury Secretary Henry M. Paulson Jr. said Wednesday that he opposed funding the plan from the government's $700 billion financial rescue fund, which has been used primarily to rescue banks and encourage lending. FDIC officials say they are still in talks with the Treasury, but proponents increasingly view the Bush administration as a roadblock with an expiration date.

"We think it's essential that we actually strike at the underlying cause of the problems in the financial markets," said Michael Krimminger, special adviser for policy at the FDIC. "We think it's time to make a decisive difference in the housing markets on foreclosures."

The FDIC proposal, which is scheduled to be announced today, goes farther toward helping borrowers than existing modification efforts. At the same time, the initiative is designed to be less expensive for mortgage companies because the government would pick up part of the tab.

Borrowers who have missed at least two monthly payments would be eligible for a reduction in their payment. The new payment would require that they spend no more than 31 percent of their monthly income, a relatively conservative standard. By comparison, lenders historically calculated that borrowers could afford to spend up to 28 percent of monthly income before taxes on housing.

In exchange, mortgage companies would receive a basic guarantee: If the borrower falls behind on the new monthly payments and the company ends up losing money on the loan, the federal government will cover half the loss in most cases.

The estimated cost of the plan is based on the assumption that only one in three borrowers who get a modification will be unable to make the lower payments. That would require a higher success rate than existing modification programs have achieved. About 45 percent of borrowers who received loan modifications from mortgage companies last fall already have slipped back into default, according to a Credit Suisse research note.

But FDIC officials say the comparison is misleading because the FDIC plan would give borrowers a much better chance at success.

"Most of the modifications that have been done to date are not sustainable modifications," said Richard Brown, the FDIC's chief economist. He called them "repayment plans," meaning that borrowers are getting a second chance but not a payment reduced to a level they can afford.

Members of the Senate Banking Committee yesterday expressed support for the Bair plan and anger at Paulson's opposition.

Sen. Christopher J. Dodd (D-Conn.) also said that he planned to introduce legislation that would allow bankruptcy courts to modify mortgage loans, another step long sought by consumer advocates and strongly opposed by the banking industry.