WASHINGTON — Federal Deposit Insurance Corp. Chairman Sheila Bair offered a new proposal Wednesday to let the Treasury Department lend directly to borrowers to save more than 1 million homes from foreclosure.
Her plan, unveiled in a media campaign, caught many off-guard and did not appear to have been widely circulated on Capitol Hill or previously vetted with the Bush administration. Lawmakers and the White House are in the midst of negotiating a different plan for the Federal Housing Administration to insure loans worth more than the value of a home, and some saw Ms. Bair's gambit as muddying the waters.
But they also hesitated to dismiss the idea out of hand, saying she is held in high esteem by Democrats and that her early warnings about the mortgage crisis presaged many of the government responses to date.
"The FDIC has been a real ideas place over the last several months," said Brian Gardner, a political analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "They're making a good-faith effort. They've been putting stuff out to see what might get some traction. … Up on the Hill, they do have credibility."
But Ms. Bair's idea struck some observers, including Mr. Gardner, as coming too late in the process and presenting its own set of problems. Some version of the FHA plan touted by House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Chris Dodd is more likely to be enacted, they said. "The debate is so far down the track right now with Frank and Dodd that I'm pretty skeptical" the FDIC plan can move, Mr. Gardner said.
Under the plan, mortgage investors — lenders who have held onto a loan or others who bought it in a securitization — would apply to the Treasury for funds equal to as much as 20% of the principal of an "unaffordable" mortgage, in effect creating a second lien owned by the government. The FDIC defines eligible mortgages as those originated between January 2003 and June 2007 with a debt-to-income ratio of 40% or higher.
In return, the servicer, working on behalf of the investors, must restructure the remaining loan balance into a 30-year, fixed-rate product and pay a subscription fee equal to the first five years of interest payments on the loan the Treasury made to the investors. After five years, the borrowers would begin paying interest on the second loan at Treasury rates.
In the event of a foreclosure, the Treasury's loan would supersede the remainder of the original loan in repayment priority, the FDIC said.
For example, with a $200,000 loan deemed unaffordable, investors could get a $40,000 loan and agree to restructure the remaining $160,000 primary loan. Investors would immediately pay the Treasury five years of interest on the $40,000. After five years, the borrowers would begin repayment of the $40,000 loan to the government at a fixed Treasury interest rate. If the home were foreclosed on, the servicers would have to repay $40,000 to the government immediately.
The plan would also subject participating servicers to periodic audits by an unspecified federal banking agency.
The FDIC touted the proposal as a vehicle for investors to get a better return than with a foreclosure. It said the plan sidesteps the risks posed to the taxpayers by Rep. Frank's FHA refinancing bill, which would call for the FHA to insure the vast majority of the remaining loan after a principal writedown.
"It recognizes that everybody needs to contribute a little to make the program work," Ms. Bair said in an interview. "We think it has good bipartisan appeal. It's not meant to substitute for any of the other existing plans. It's to complement them."
Ms. Bair, a Republican, said the plan is a systematic approach that would reach borrowers the FHA refinancing plan, which she generally supports, would not. Voluntary loan modifications by an alliance of lenders and servicers since last fall have been helpful but are "not enough," she said, with foreclosures still on the rise. She also warned against relying too heavily on the FHA for help, saying the program has its own issues.
"There are some generally acknowledged limitations with FHA," she said. " One is just scale. … They're a wonderful agency, but they're a relatively small agency. The second is [that] refinancing is by definition a loan-by-loan process. You have to find a new lender. You have to re-underwrite. You have to get a new appraisal. … I think there's going to be a time element of how quickly you can do these."
The FDIC plan would let borrowers "ride out the current housing crisis and give them some breathing room to make an affordable payment and build some equity," she said.
She also emphasized that it would not put the government at risk.
Reactions from lawmakers and industry representatives were lukewarm at best.
Rep. Frank, who said the plan was "an affirmation from a Bush administration appointee who has responsibility for banking of the need for action," also said it posed clear problems.
"The one thing that we've avoided" in his FHA refinancing bill is, "we don't write checks to … the people that hold the loans," Rep. Frank said. "That is a pretty big problem in trying to get [Ms. Bair's plan] done … ; it would require writing some checks to them."
Ms. Bair said the investors had to see some benefit from the plan to motivate participation.
"We made some tradeoffs," she said in a conference call with reporters. "The balancing act is to make sure they pay their fair share for getting the loans restructured but not make it so onerous that no one will participate."
At least one Republican disagreed. Rep. Judy Biggert, the ranking member of the House Financial Services financial institutions subcommittee, said it sounded as though most of the risk would be borne by the lenders, servicers, and borrowers instead of the government. She noted the FDIC plan required the government loan to be paid back first.
"It does a really important thing by shifting the risk onto the lender and the borrower rather than on the taxpayer," she said.
Industry representatives, however, appeared wary.
Scott Talbot, the Financial Services Roundtable's chief lobbyist said a whole new proposal for addressing troubled mortgages might push policymakers backward.
"It sets the federal government up as a lender, which creates a whole host of problems," he said. "Procedurally, Congress and the administration are far along in addressing the subprime situation through expanding FHA. The session is running out of days, and the proposal would take us back to square one. The housing market and the economy need a response now."
Ms. Bair's plan was announced as the House Financial Services Committee continued debate Wednesday on Rep. Frank's bill. A vote on the bill could come as early as Wednesday evening.
