The FDIC is polishing up the latest in a line of magic housing bullets–this one a scheme in which the Treasury goes into the mortgage-lending business. The Treasury would lend up to 20% of the principal of the existing mortgage (thus bailing out the primary lender), and the homeowner wouldn’t have to start paying back principal for five years.
And the source of funding? A $50 billion public debt offering.
FDIC Chairman Sheila Bair is finalising a legislative proposal that would allow the Treasury Department to make direct loans for close to one million homeowners in the latest government initiative to stabilise the slumping mortgage market.
The plan would authorise the new government loans so that borrowers could pay down up to 20% of the principal they owed on their mortgage, according to a confidential draft of the plan obtained by The Wall Street Journal. That would mean that if a homeowner owed $100,000 on a mortgage, the government could loan up to $20,000 to pay down the principal….
According to the draft, borrowers would still be required to pay their mortgage and the new government loan, but they would not have to make any payments on the Treasury loan for the first five years. During that time, investors in the loans would pay interest to Treasury, and after five years homeowners would begin repaying the Treasury loan at fixed Treasury rates.
For loans to qualify, mortgage investors would “pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.”
To modify one million loans, the FDIC estimated it would require a $50 billion public debt offering. Treasury would recoup the costs because it would have the first priority to recover funds if homes are sold, refinanced, or if the borrower goes into default.
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