The Federal Deposit Insurance Corp. unveiled details Friday of its proposal to use government guarantees to modify roughly 2.2 million troubled loans.
The centerpiece of the plan envisions the government sharing up to half of a modified loan's losses if it goes into default again. The government also would pay servicers $1,000 per modified loan to cover their costs.
The FDIC estimates it could prevent 1.5 million forecloses and cost the government $24 billion.
"A loss-share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification," the agency said on its Web site Friday.
The new details come as FDIC Chairman Sheila Bair and Democratic members of Congress have pushed the Treasury Department for weeks to make a modified loan guarantee plan part of the administration's $700 billion financial rescue package. But despite early signs Treasury was interested, Secretary Henry Paulson this week indicated he has problems with the idea.
While he called Ms. Bair's plan "an important program" at a press conference Wednesday, he added that it would be "a subsidy or spending program." That, Mr. Paulson added, is not consistent with the Troubled Asset Relief Program, which has favored direct capital injections into financial institutions.
"We have Tarp, which is an investment, not spending," he said.
The FDIC said as many as 4.4 million loans could be considered for a modification under the program. They include 1.4 million loans 60 days or more past due, as well as 3 million more projected to become delinquent by the end of 2009.
The FDIC said the loss-sharing guarantee would not apply if the borrower defaulted within the first six payments of the modified loan. For underwater loans, the government's loss share would be cut from 50% to 20%. The program would be limited to owner-occupied properties.
Participating servicers would also have to carry out a "systematic review" of loans they service and ensure modified loans would result in a greater "net-present" value for investors than a foreclosure. Servicers failing to meet such a test would be disqualified.
"Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow …," the agency said. "It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures."