The head of the FDIC, Sheila Bair, has proposed a $50 billion bail-out for homeowners and lenders. In basic terms, her plan would have Uncle Sam create something outside the FHA mortgage program, a so-called HOP or Home Ownership Preservation loan.

Distressed borrowers would get a government loan equal to 20 percent of their current mortgage balance and lenders would provide the 80-percent balance in the form of a fixed-rate, self-amortizing mortgage.

This plan raises a number of questions, such as: What if borrowers don’t pay? Will lenders be required to make a short sale? Is 100 percent financing a good idea — especially if home values continue to decline?

An outline of the plan is below:

The FDIC is proposing that Congress authorize the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers. This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.

This proposal is designed to result in no cost to the government:

___ Borrowers must repay their restructured mortgage and the HOP loan.
___ To enter the program, mortgage investors pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
___ Treasury would have a super-priority interest — superior to mortgage investors’ interest — to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
___ The government has no continued obligation and the loans are repaid in full.

Mortgage Restructuring:

___ Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
___ Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower’s verified current gross income (’front-end DTI’). Prepayment penalties, deferred interest, or negative amortization are barred.
___ Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
___ Servicers would agree to periodic special audits by a federal banking agency.

Process:

___ Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
___ Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.

Funding:

___ A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were “unsustainable at origination.” Principal and interest costs are fully repaid.

Eligible Mortgages:

Applies only to mortgages for owner-occupied residences that are:

1. Unaffordable – defined by front-end debt-to-income ratios exceeding 40 percent at origination.

2. Below the FHA conforming loan limit.

3. Originated between January 1, 2003 and June 30, 2007.

This entry was posted on Thursday, May 1st, 2008 at 12:43 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.