FDIC Proposes Plan to Pay Down “Unaffordable” Mortgages
The Federal Depost Insurance Corporation today proposed that the Treasury Department be authorized to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal.
The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers, the FDIC said.
This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.
Borrowers must repay their restructured mortgage and the HOP loan.
To enter the program, mortgage investors pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment. Unaffordable loans are desfined by the FDIC as those held by borrowers with a debt-t0-income ratio of over 40%.
Key provisions of the proposed plan:
- Treasury would have a super-priority interest — superior to mortgage investors’ interest — to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
- The government has no continued obligation and the loans are repaid in full.
- Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
- Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower’s verified current gross income (’front-end DTI’). Prepayment penalties, deferred interest, or negative amortization are barred.
- 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.
A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were “unsustainable at origination,” according to the FDIC.
FDIC Chairman Susan Bair advocates the approach in an article in today’s Financial Times. She sees the loans as complementing plans by Congress and the White House to expand eligibility for loans guaranteed by the Federal Housing Administration. “These proposals are laudable and will help some borrowers, but they have generally acknowledged limitations.”
“Borrower loan programmes have been suggested by eminent economists, such as Martin Feldstein. This proposal would require cost-sharing by mortgage investors as well as borrowers; it limits eligibility to mortgages that were al- ways unaffordable and provides a super- priority interest to assure repayment.”
Importantly, this proposal keeps the risk of re-default on mortgage investors. It allows the government to leverage its lower borrowing costs to reduce fore-closures significantly with no expansion of contingent liabilities and little net cost.
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