The FDIC is Proposing a Home Loan Program Run Directly by the Treasury

It's called the Home Ownership Preservation Loan program.

Looking at the program, I think that it is directed primarily at the people who should have known better, mortgage lenders and home builders, with benefits "trickling down" to ordinary programs.

So once again, we see socialism for the fat cats, and capitalism for the tax payers.

As Tanta of CR notes, this would be at little cost to the government, at least if the borrower does not walk away from the home, and there are incentives to prevent that, but the lender (more accurately the holder of the loan) may not be willing to make the concessions to qualify.

If the borrower is at low risk of default, why should the lender take a haircut, if it they are at high risk, do they want to be at the behind the US Treasury in line?

Tants's take, and mine, is that it's PR more than a serious program.

The FDIC proposal from their web page:

Home Ownership Preservation Loans

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 DTIs exceeding 40 percent at origination.
2. Below the FHA conforming loan limit.
3. Originated between January 1, 2003 and June 30, 2007.