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FDIC plan places U.S. as direct lender
WASHINGTON (5/2/08)—The Federal Deposit Insurance Corp. is asking Congress to consider a whole new approach to helping homeowners with mortgages that have become unaffordable: Allow the U.S. Treasury Department to make direct loans to help pay down as much as 20 % of the principal of a troubled loan. FDIC Chairman Sheila Bair said in a statement that her plan is “scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.” Under the proposal, which Bair said is designed to result in no cost to the government, the Treasury could provide Home Ownership Preservation (HOP) loans. Eligible, unaffordable mortgages could be paid down to the cap and restructured into fully-amortized, fixed-rate loans for the balance of the original loan term at the lower balance. The new interest rate would be capped at Freddie Mac 30-year fixed rate and the restructured mortgages could not exceed a debt-to-income ratio for all housing-related expenses greater than 35% of the borrower's verified current gross income. Prohibited would be such things as prepayment penalties, deferred interest, or negative amortization are barred. The FDIC indicated that mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates. Servicers would agree to periodic special audits by a federal banking agency. Some observers were reported (American Banker, May 1) as noting that the FDIC plan comes too late in the government’s process of developing plans to deal with the subprime mortgage situation to be able to get much traction. They opined that some version of the FHA plan backed by both House Financial Services Committee Chairman Barney Frank (D-Mass.) and Senate Banking Committee Chairman Christopher Dodd (D-Conn,) is more likely to be passed by Congress.

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