Mortgage
US plans mortgage guarantee scheme
The US government and federal regulators are zeroing in on a proposal to provide mortgage guarantees to lenders that agree to restructure home loans to ensure affordable monthly payments.
The idea is loosely modelled on the loan restructuring programme that is being implemented by the Federal Deposit Insurance Corporation for borrowers at IndyMac, a failed bank taken over by regulators this year.
People familiar with the discussions say the pr-oposed scheme would be less restrictive than a recently established refinancing programme run by the Federal Housing Administration under legislation designed by Congressional Democrats Barney Frank and Chris Dodd.
Under the plan, lenders willing to modify troubled loans so that the monthly payment was no more than a certain percentage of income - possibly the 38 per cent figure used by the FDIC at IndyMac - would be able to apply to secure a guarantee from the government against some or all of the additional loss if the modified loan went into default.
"A framework is needed to modify loans on a scale large enough to have a major impact,'' said Sheila Bair, FDIC chairman, yesterday. Pressure has been growing for the US to tackle its enduring housing crisis with more direct government intervention.
The initial restructuring envisaged by the new plan would come about through some combination of a write down of loan principal, a reduction in interest rates and/or the extension in the term of a loan, for example from 20 to 30 years.
The proposal focuses on a cash-flow test and would not separately require the lender to write the loan down to less than the current value of the home in order to qualify for a subsequent government loan guarantee - a requirement of the current FHA plan.
This might make it more attractive to lenders, but many analysts are sceptical about renegotiation plans that only use cash-flow tests - households who could afford a loan may still walk away if the value of their house falls far below the value of their loan, placing them deep in "negative equity".
The federal government would not share the loss on the initial loan restructuring. However, people familiar with the discussion say in many cases the lender would be better off writing down the loan to begin with rather than face all the costs associated with foreclosure.
Officials said a plan was not finalised. "The Administration is looking at ways to reduce foreclosures and that process is ongoing. We have not decided on a particular approach," said a Treasury spokeswoman.
(Published by Financial Times - October 31, 2008)