Feds to the Rescue during Foreclosures?

The Federal Deposit Insurance Corp. and the Treasury Dept. are planning a major program to stop extensive foreclosures that would include government guarantees of home mortgages.

The plan would use $50 billion from the recently passed bailout package to provide as much as $500 billion to $600 billion in government guarantees on up to 3 million at-risk mortgages. It might ask banks and savings and loans to offer loans with lower interest rates for a five-year period, while changing to the government any risk if the home doesn't recover its full mortgage value within that time.

Without giving full details, FDIC Chairman Sheila Bair talked the program on Oct. 29 at an international deposit insurers' conference in Arlington, Va. She said the agency has developed "a federal program to help more borrowers avoid foreclosure…such a framework is needed to revise loans on a scale large enough to have a major impact."

Bair said discussions are ongoing with the Treasury Dept. The proposal could be out as soon as Oct. 30, says a lobbyist familiar with both elements of the plan and negotiations.

However, a Treasury Dept. spokeswoman denied that such a proposal is ready. "That is simply inaccurate," said Treasury spokeswoman Jennifer Zuccarelli. "We are looking at a number of proposals on foreclosure prevention, but no one proposal has been decided upon."

Details of the plan the FDIC is pushing could change as Treasury assesses it. The lobbyist said there may yet prove to be friction with the White House over the plan, as well.

It is not enough

A mandatory mortgage-relief program would be the government's most daring move on behalf of homeowners since the sub prime crisis began picking up steam last year. Bair made a similar proposal six months ago, but it was discharged without much discussion. Until now, a Bush Administration plan that was voluntary for banks has failed to encourage enough loan modifications and prevent foreclosures.

Still, critics say that the five-year loan modification program could be putting off the inevitable for borrowers, and that the $50 billion committed to backing it up may not be enough to put a serious hole in the wave of foreclosures.