New foreclosure plan on tap
FDIC chief Sheila Bair says government is working on ways to use authority under bailout law to prevent foreclosures.
NEW YORK (CNNMoney.com) -- The federal government, which has been criticized for not doing enough for Main Street while coming to the immediate aid of banks, is working on a new plan to help troubled homeowners.
The plan was discussed Thursday at a Senate Banking Committee hearing that probed the federal response to the credit crisis.
Lawmakers repeatedly urged Treasury to act with dispatch and draw up clear guidelines to ensure that banks that receive taxpayer funding begin lending again and do all they can to prevent foreclosures.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that her agency and the Treasury Department are working closely to find ways to prevent avoidable foreclosures. The plan would use the Treasury Secretary's new authority under the Emergency Economic Stabilization Act to provide guarantees to lenders and companies that service mortgages.
"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "Specifically the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."
That way, she said, "unaffordable loans could be converted into loans that are sustainable over the long term."
Bair said one way loan guarantees can be used to prod loan servicers to modify more mortgages is for Uncle Sam to guarantee that the government would compensate servicers for losses in cases of re-default - that is, when a borrower receives a modified loan but then ends up becoming delinquent on the new mortgage.
Re-defaults have been a concern for loan servicers, who must make the case to investors that a modification is a better deal for them than a foreclosure.
The risk of re-default "is one area where greater certainty could be provided," Bair said, noting that it could make the option of modifying a loan "irresistible" to a servicer.
Bair is taking the lead in shaping the government's next step on preventing foreclosures, but the Treasury is charged with creating such a program. Bair said Treasury is doing its due diligence and "is moving in a timely way."
Neel Kashkari, the Treasury's interim assistant secretary for financial stability, told lawmakers Thursday that "we are looking at [the loan guarantee idea] very closely. It's something we're seriously considering."
Americans have made it clear they are not happy that the $700 billion financial rescue package is focused so heavily on financial institutions and less so on helping homeownwers directly.
"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 whose plight is at the root cause of this crisis," said Senate Banking Committee Chairman Christopher Dodd, D-Conn.
Bair, who worked with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke in crafting the financial rescue law, has been a longtime advocate of streamlining the modification process for homeowners who realistically have a chance of affording their mortgages once modified.
After the FDIC became conservator of mortgage lender IndyMac this summer, Bair instituted a loan modification process for loans that were 60 days or more past due and which IndyMac either owned directly or serviced. About two-thirds of the 60,000 loans under IndyMac's umbrella are considered potentially eligible for the new program, she said.
"Through this week, IndyMac Federal has mailed more than 15,000 modification proposals to borrowers and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures," Bair said. So far, more than 3,500 have accepted the offers and others are being "processed."
The modifications on average have cut borrowers' monthly payments by more than $380, Bair said.
Not all foreclosures are preventable since some homeowners still won't be able to afford their homes, even under modified loan terms. Bair said the loans being modified at IndyMac must provide "improved value" for the bank or for the investors who own the loans.
She added that she hoped the IndyMac modification program will serve as a "catalyst" for more loan modifications around the country.
Other witnesses at Thursday's hearing included Brian Montgomery, the assistant secretary for housing at the Department of Housing and Urban Development; James Lockhart, director of the Federal Housing Finance Agency; and Elizabeth Duke, a member of the Federal Reserve Board of Governors.
Kashkari is leading the Treasury's efforts under the $700 billion bailout to buy mortgage-backed securities and invest in banks. He said Thursday that Treasury "will look for every opportunity possible to help homeowners" as it carries out the plan.
Members of the banking committee repeatedly urged the Treasury move swiftly.
"Your actions and decisions are critically important to inspiring taxpayer confidence," said Sen. Bob Casey, D-Pa., noting that jobless rates are rising - which increases foreclosure risks. Dodd, meanwhile, said thousands of families are entering into the foreclosure process every day. Depending on the state, the foreclosure process can take several months to complete and not everyone who enters it loses their home.
For his part, Lockhart said that mortgage finance companies Freddie Mac and Fannie Mae - which own or back trillions of dollars in home loans - are pushing hard to help homeowners.
"We have already been working with Fannie Mae and Freddie Mac to find new ways to prevent foreclosures," Lockhart said. For example, he said the companies have boosted resources and staff aiming at assisting companies that service loans.
Banking committee members expressed frustration on behalf of their constituents that the financial institutions receiving capital injections from public coffers may be getting too much latitude in deciding how they use the money.
The intent of offering taxpayer funds is to spur banks to lend more and do more to keep troubled borrowers in their homes.
Kashkari said the Treasury is pushing on financial institutions to do that but "we are afraid of discouraging healthy institutions from participating ... because they're in the best position to lend." He noted that restrictions on the use of that capital pertaining to the issuance of dividends and share repurchases provide "strong incentive to put that capital to good use."
Recognizing that a legally binding, one-size-fits-all approach may not be possible given the broad range of institutions that might participate, lawmakers nevertheless told Kashkari they would like Treasury to consider issuing guidelines that state very strongly how the banks are expected to use the money.
Some banking committee members also expressed frustration with relying on the voluntary participation of lenders under a loan guarantee program. Sen. Robert Menendez, D-N.J., noted that the foreclosure-prevention programs already in place rely on lenders' good graces and have failed to adequately address the problem.
Bair said the government and lenders are far behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, going forward "there needs to be a package of carrot-and-stick incentives." 
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