FDIC Chief Suggests Guarantees for Loans

Source: AP
Date: October 23, 2008

The head of the FDIC said Thursday the government can use its new emergency authority from Congress to help struggling homeowners overhaul mortgages by giving banks an incentive to modify the loans.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been urging that the government do more to help tens of thousands of home borrowers avert foreclosure. She suggested in prepared testimony to Congress that could be done by having the government set standards for modifying mortgages into more affordable loans and providing loan guarantees to banks and other mortgage services that meet them.

Bair's proposal came in testimony she readied for a Senate Banking Committee hearing.

Bair was appearing with other federal regulators on Capitol Hill as the Bush administration weighed how to implement a program in the $700 billion bailout law passed by Congress last month to help financially strapped homeowners renegotiate more affordable loans and avoid foreclosure.

That new rescue law includes several provisions to encourage mortgage revisions for homeowners in difficulty, Bair noted in her testimony. They give the Treasury Department authority to use loan guarantees and credit enhancements to promote modifications of mortgages to make them more affordable.

"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said in her prepared testimony. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term."

The FDIC is working "closely and creatively" with the Treasury Department on such a plan, she said.