Bair Outlines New Incentive-based Foreclosure Plan on Capitol Hill
Monday, November 03, 2008
Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC) told lawmakers on Capitol Hill yesterday that banking regulators are working on a new program to help distressed homeowners escape foreclosure. At the Senate Banking Committee hearing Thursday, Bair said her agency is working closely with the Treasury Department on a new $40 billion initiative that would give greater incentive to mortgage servicers and investors to refinance under-performing home loans by having the government guarantee part of the rewritten loan.
With the passage of the historic Emergency Economic Stabilization Act (EESA) in early October, legislators urged the Treasury to draw up clear guidelines to ensure that banks receiving taxpayer funds begin lending again and take a proactive role in preventing foreclosures. Earlier this week, DSNews.com reported that House representatives Barney Frank (D-Massachusetts) and Maxine Waters (D-California) have advised President Bush to appoint Bair to supervise and coordinate a nationwide, government-led foreclosure prevention effort.
Under the new plan put forth by Bair yesterday, Treasury Secretary Henry Paulson would use the authority granted to him under EESA to provide warrants to lenders and mortgage servicing companies, guaranteeing that the government would compensate them for losses incurred in the event of re-default – meaning that a borrower receives a modified loan but then becomes delinquent on the new mortgage. Specifically, Bair said, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards.
The risk of re-default “is one area where greater certainty could be provided,” Bair said, especially since that risk sometimes makes it hard for servicers to sell the idea to investors that a modification is a better deal for them than a foreclosure. According to Bair, a re-default guarantee could make loan modifications “irresistible” to servicers and their investors.
Although Bair is taking the reins on shaping the government's next step to preventing foreclosures, it is the Treasury's job to logistically create such a program. Bair said yesterday that the Treasury is carrying out its due diligence and “is moving in a timely way.”
Neel Kashkari, the Treasury's interim assistant secretary for financial stability and recently appointed supervisor of the government's Troubled Asset Relief Program (TARP), told the committee Thursday that his Department was looking very closely at the loan guarantee idea. “It's something we're seriously considering,” he said.
“Now that the administration has taken strong measures to stabilize financial institutions, it is imperative that we apply the same sharp and urgent focus to help the individual homeowners whose plight is at the root cause of this crisis,” said Senate Banking Committee Chairman Christopher Dodd (D-Connecticut). Dodd said he was evaluating a new round of foreclosure-targeted legislation after the November election, including changes to allow bankruptcy judges to rewrite problem mortgages. “I think we've come to the point again where...legislatively we have to try this again and probably some other ideas,” he said.
Federal Housing Finance Agency Director James B. Lockhart also testified before the committee and echoed Bair's appeal for an industry-wide approach to loan modifications. "The most critical components of stabilizing the mortgage market are assisting borrowers at risk of losing their homes and reducing foreclosures," he said.
Bair said that both the government and lenders have fallen far short of where they should be in terms of preventing avoidable foreclosures. While voluntary programs have been helpful up to this point, she said, going forward “there needs to be a package of carrot-and-stick incentives.”
With the passage of the historic Emergency Economic Stabilization Act (EESA) in early October, legislators urged the Treasury to draw up clear guidelines to ensure that banks receiving taxpayer funds begin lending again and take a proactive role in preventing foreclosures. Earlier this week, DSNews.com reported that House representatives Barney Frank (D-Massachusetts) and Maxine Waters (D-California) have advised President Bush to appoint Bair to supervise and coordinate a nationwide, government-led foreclosure prevention effort.
Under the new plan put forth by Bair yesterday, Treasury Secretary Henry Paulson would use the authority granted to him under EESA to provide warrants to lenders and mortgage servicing companies, guaranteeing that the government would compensate them for losses incurred in the event of re-default – meaning that a borrower receives a modified loan but then becomes delinquent on the new mortgage. Specifically, Bair said, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards.
The risk of re-default “is one area where greater certainty could be provided,” Bair said, especially since that risk sometimes makes it hard for servicers to sell the idea to investors that a modification is a better deal for them than a foreclosure. According to Bair, a re-default guarantee could make loan modifications “irresistible” to servicers and their investors.
Although Bair is taking the reins on shaping the government's next step to preventing foreclosures, it is the Treasury's job to logistically create such a program. Bair said yesterday that the Treasury is carrying out its due diligence and “is moving in a timely way.”
Neel Kashkari, the Treasury's interim assistant secretary for financial stability and recently appointed supervisor of the government's Troubled Asset Relief Program (TARP), told the committee Thursday that his Department was looking very closely at the loan guarantee idea. “It's something we're seriously considering,” he said.
“Now that the administration has taken strong measures to stabilize financial institutions, it is imperative that we apply the same sharp and urgent focus to help the individual homeowners whose plight is at the root cause of this crisis,” said Senate Banking Committee Chairman Christopher Dodd (D-Connecticut). Dodd said he was evaluating a new round of foreclosure-targeted legislation after the November election, including changes to allow bankruptcy judges to rewrite problem mortgages. “I think we've come to the point again where...legislatively we have to try this again and probably some other ideas,” he said.
Federal Housing Finance Agency Director James B. Lockhart also testified before the committee and echoed Bair's appeal for an industry-wide approach to loan modifications. "The most critical components of stabilizing the mortgage market are assisting borrowers at risk of losing their homes and reducing foreclosures," he said.
Bair said that both the government and lenders have fallen far short of where they should be in terms of preventing avoidable foreclosures. While voluntary programs have been helpful up to this point, she said, going forward “there needs to be a package of carrot-and-stick incentives.”
