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FDIC chief presses for gov't action on mortgages
11/25/2008
WASHINGTON (AP) — The head of the FDIC on Tuesday pressed again for more aggressive government action to help millions of home borrowers avert foreclosure, saying federal money is needed to ensure economic recovery.
Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared testimony for a House hearing that as mortgage foreclosures mount, the government is "clearly falling behind the curve."
The FDIC broke with the Bush administration last week and proposed using $24 billion in government funds to help 1.5 million struggling borrowers by guaranteeing modified mortgages through the end of 2009.
Bair also said all banks should pay their managers appropriate compensation that discourages excessive risk-taking.
House Democratic leaders, meanwhile, are urging Treasury Secretary Henry Paulson to support the FDIC proposal — which the Bush administration has adamantly opposed.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said "it is essential" to use some of the funds in the government's $700 billion financial rescue program to stem the tide of foreclosures.
Under the FDIC's new plan, the government would guarantee 2.2 million modified mortgages — mainly high-risk loans made to borrowers with weak credit or small down payments — through the end of next year. The agency says the government's backing would make the lending industry more willing to modify home loans because taxpayers would absorb half the losses if the borrower defaults a second time.
Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.
Even if a third of borrowers default again on their modified loans, 1.5 million homes would still be saved, the FDIC says. Under the agency's plan, monthly payments shouldn't total more than 31 percent of homeowners' pretax monthly income.
Bair also testified that the FDIC's new program for guaranteeing debt issued by banks and thrifts, which could be worth up to $1.4 trillion, has brought "steady progress in reducing risk premiums" in money and credit markets since it took effect in mid-October.
In addition, federal regulators expect that all banks "will compensate their managers in ways that will encourage the type of sustainable lending that leads to long-term profitability," she said.
Source: http://www.google.com/hostednews/ap/article
