Efforts by FDIC Chairman Sheila C. Bair to persuade President George Bushís administration to help homeowners in danger of foreclosure are finally getting results. Bairís loan modification plan is said to be nearing approval at the White House of Management and Budget.
Bairís scheme aims to help about 3 million homeowners who are likely to get foreclosure notices in 2009. Their mortgage loans would be modified using a model similar to what was successfully implemented by FDIC to help distressed borrowers at IndyMac. The program will generally target troubled borrowers who were enticed to take out mortgage loans with adjustable rate mortgage (ARM) options, Alternative-A mortgage options or with other clauses that they did not fully comprehend.
If approved, the program will be given a budget of about $40 to $50 billion, which will probably come from the second half of the $700 billion foreclosure prevention plan approved by national legislators in October 2008.
Bairís plan asks the federal government to guarantee up to 50 percent of losses that would be incurred by mortgage servicers and investors in case borrowers who avail of loan modifications default again. Loan servicers would also be paid for their processing activities. To help ensure that borrowers will not become delinquent again, the scheme requires the loans to be modified so that monthly amortizations would drop to about 31 percent of gross monthly income.
Other possible ways to increase affordability and help prevent foreclosure are reduction of mortgage interest rates and extension of loan terms to up to 40 years.
According to Credit Suisse, over eight million foreclosures will be filed over the four-year period beginning 2009 if there is no intervention. Credit Suisse said that its foreclosure figure includes nearly 60 percent of all subprime mortgage loans and more than ten percent of adjustable rate mortgages, Alternative-A mortgages and prime mortgage loans.
Leticia Carvalho has been educated in the finer points of the foreclosure market over 5 years.