Treasury, FDIC Said to Craft Plan to Curb Foreclosure

By Alison Vekshin and Robert Schmidt

Oct. 29 (Bloomberg) -- The U.S. Treasury and the Federal Deposit Insurance Corp. are considering a plan that may provide about $500 billion in government guarantees for troubled mortgages, according to people familiar with the matter.

The program, which might help several million homeowners refinance into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay. Under one option, the industry would keep lower monthly payments for five years before raising interest rates, the people said.

FDIC Chairman Sheila Bair discussed the program today at an international deposit insurers conference in Arlington, Virginia, without offering details. ``A framework is needed to modify loans on a scale large enough to have a major impact,'' Bair said.

The action would be the government's most aggressive yet on behalf of homeowners since the subprime crisis began. The Bush administration until now has relied mainly on a voluntary, industry-led alliance to spur loan modifications and avert foreclosures.

Multiple options to stem foreclosures are being considered by the agencies and a final decision on a ``particular approach'' hasn't been made, said Jennifer Zuccarelli, a Treasury spokeswoman. ``The administration is looking at ways to reduce foreclosures, and that process is ongoing.''

Bair, whose Washington-based agency insures deposits at U.S. banks, is pressing the mortgage industry to modify more loans to curb foreclosures, which rose to the highest on record in the third quarter led by California, Florida, Arizona, Ohio, Michigan and Nevada, according to California-based RealtyTrac.

Incentives

The FDIC and Treasury program would provide incentives to mortgage lenders and loan-servicing companies to change their loans, ``along with a framework for modifying them systematically into long-term and sustainable, affordable mortgages,'' Bair said.

The plan would apply to banks, savings and loans, hedge funds and other mortgage holders, the people said. While it would provide guarantees for about $500 billion in mortgages, it would cost about $50 billion that would be covered by the $700 billion bailout package enacted this month.

The government is also considering guaranteeing a second home loan, such as a home-equity line of credit, to assure mortgage holders they wouldn't lose money when they change loan terms, the people said. A guarantee in effect would put taxpayers on the hook for the loan if borrowers default.

The FDIC would manage the program, the people said, adding that details are still being worked out and might change.

`Productive Conversations'

While the FDIC has had ``productive conversations'' with Treasury on using loan guarantees, ``it would be premature to speculate about any final framework or parameters of a potential program,'' FDIC spokesman Andrew Gray said in an e-mailed statement.

Bair last week said the rescue plan lets the government set standards for mortgage modifications and offer loan guarantees for mortgages that meet the standards.

``Loan guarantees could be used as an incentive for servicers to modify loans,'' Bair said in her Oct. 23 testimony before the Senate Banking Committee. ``The FDIC is working closely and creatively with Treasury to realize the potential benefits of this authority.''

To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.netRobert Schmidt in Washington at rschmidt5@bloomberg.net;