Treasury Secretary Henry Paulson may be a lame duck in his own right.
The soon-to-depart Paulson made little effort this week to back the idea of abrogating millions of mortgage contracts, opening the door for FDIC Chairman Sheila Bair to step in.
On Friday, Bair essentially proposed exactly that: She wants the FDIC to expand nationally a plan it used to unwind thousands of mortgages held by failed California bank IndyMac, which her agency took over in July.
Under the plan, mortgage holders or servicers — banks that manage other banks’ loans for a fee — would get $1,000 upfront for each loan they rework to as low as 31 percent of the borrower’s income.
The target would be reached by lowering interest rates, by extending amortizations, or both. In some cases, the loan holder would have to give up some portion of principal, Bair told NPR on Friday.
Homes would have to meet FDIC conformance limits, so most oversized homes would not quality, Bair said. If the borrower defaults on the new loan, the government would share up to half the losses with the mortgage lender.
Bair expects 2.2 million borrowers could get new loans under the IndyMac-style plan. Some would default in any case, but the FDIC figures it would keep 1.5 million people in their homes in the end.
The agency puts the cost of the plan at $24.4 billion, which Bair expects will come from $700 billion bailout, although she admits that she and Paulson disagree on using the funding for her plan.
Alternatively, the Bush administration said it expects modifications of loans held or guaranteed by now government-run Fannie Mae and Freddie Mac.
In any case, 2.2 million would only be a start on the much larger problem ahead.
Currently, 7.5 million Americans owe more on their homes than those homes are worth. Another 2.1 million will follow them if home prices decline another 5 percent, practically a given as the recession kicks in.
In the third quarter, nearly one in five borrowers was underwater, according to data tracker First American CoreLogic.
And we’re now in a trough, in terms of mortgage resets, one that has been blunted at the banking level by the bailout spending so far.
Analysts expect $30 billion to $50 billion worth of interest-rate resets a month from 2009 through 2011. Even if benchmark rates were to fall to zero and mortgage rates followed closely, most of those borrowers still would be unable to keep up.
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