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FDIC, Treasury clash on anti-foreclosure plan

Business Materials 15 November 2008 00:46 (UTC +04:00)

A top U.S. banking regulator unveiled a plan on Friday to prevent about 1.5 million foreclosures, breaking ranks with the Bush administration by demanding bailout funds be diverted from banks to consumers, Reuters reported.

The Federal Deposit Insurance Corp said the plan would modify millions of delinquent mortgages and the government would reward participating lenders by sharing the cost of defaults on restructured loans.

The dispute over housing policy during the administration's final weeks spilled into the public as a U.S. Treasury official and the White House on Friday renewed their opposition to using money from the $700 billion bailout fund to support such a program.

Treasury Interim Assistant Secretary Neel Kashkari told a U.S. House of Representatives committee the Troubled Assets Relief Program (TARP), which the Treasury controls, was designed for investing.

"The FDIC proposal at the end of the day is a spending proposal," he said.

Kashkari said Treasury Secretary Henry Paulson thinks the FDIC proposal "is a very interesting idea" and urged Congress to consider drafting legislation to create such a program.

The White House said it is carefully reviewing the FDIC plan, but that it has to think about its potential cost.

The FDIC said its plan would cost the government about $24.4 billion, which could be paid from the TARP. Most of the money from an initial disbursement in that program has been injected as capital into banks.

FDIC Chairman Sheila Bair, who spent weeks unsuccessfully lobbying Bush administration officials for the plan, issued the proposal two days after Paulson publicly dismissed the idea.

Leading Democratic lawmakers have rallied behind Bair, a Republican, and have even pushed for her to have a place in Democratic president-elect Barack Obama's administration.

Senate Banking Chairman Chris Dodd, a Connecticut Democrat, said on Wednesday that he hopes Paulson works with Bair to get the program up and running as soon as possible to address the worst housing crash since the Great Depression.

The FDIC pushed forward with its plan, posting it on the agency's Web site on Friday morning (http://www.fdic.gov/consumers/loans/loanmod/index.html).

"Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow," the FDIC said. "It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures."

The FDIC, which insures most U.S. bank deposits, said it plans to overcome the problem of reaching borrowers, which has dogged previous efforts, by offering mortgage servicers $1,000 to cover expenses for each loan modified. It said the plan could modify about 2.2 million mortgage loans and promised to share up to 50 percent of losses incurred if a borrower defaults on a loan that has been restructured.

Eligible borrowers would include those who have missed at least two monthly payments on loans for homes they live in. Lenders would be expected to lower those borrowers' monthly payments to about 31 percent of the borrowers' monthly income.

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