FDIC Proposes to Spend $24 Billion to Address Foreclosures
The Federal Deposit Insurance Corp. (FDIC) is planning to use an estimated $24 billion in federal funds to help nearly 1.5 million homeowners in the United States avoid foreclosure.
The program includes providing guarantees to 2.2 million loans that have been modified, particularly risky loans by borrowers with small down payments or weak credit. With modified loans, borrowers will have longer loan terms and pay lower interest rates.
The FDIC explained that the U.S. government’s support will encourage the lending industry to make changes on loan terms because if borrowers failed again to make loan payments, the American taxpayers will shoulder the losses.
According to the FDIC, under its plan, 1.5 million homeowners could still avoid foreclosure even if borrowers failed to meet again their payments for their modified loans.
The total monthly payments for modified loans should not be over 31 percent of the pretax monthly income of homeowners.
Furthermore, a $1,000 payment would be given to loan servicing companies, collector and distributor of mortgage payments, for every loan they modify.
The FDIC plan would also cover about 4.4 million mortgage loans that are about to become delinquent by the end of 2008.
The estimated loans exclude those handled by Fannie Mae and Freddie Mac. These mortgage finance companies have introduced their own program that offer reduced interest rates to a borrower so that he will not spend over 38 percent of his pretax income on loan payments.
Officials of the FDIC have proposed to use a portion of the financial industry’s $700 billion bailout package to pay for its foreclosure prevention program.
The FDIC has been aggressive in its campaign to provide relief to the foreclosure crisis. Earlier, it introduced a mortgage loan modification program in which a 3 percent interest rate was pegged for five years.
FDIC senior adviser Michael Krimminger said that avoiding foreclosure is provide stability to the housing market.