Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, formulated a mortgage modification program that is expected to prevent 1.5 million foreclosure properties. Under the proposed plan, participating lenders will be rewarded with a government share on the defaults for modified loans. Mortgages will be restructured to put amortization payments down to affordable levels based on the homeowners’ income flows. This is turn would result to regular payments to finally avoid foreclosures.
For this to materialize, the program would need $24.4 billion which will come from the $700 billion Troubled Asset Relief Program (TARP). The proposal met stiff resistance from the administration which stressed that the TARP fund should be allocated for investment, and not buy out foreclosures.
The Treasury Department has already released $290 billion from the TARP fund to buy investments from banks to stabilize the financial market. $40 billion was also used to salvage insurance giant AIG. Democrats have criticized this resistance to the foreclosures plan, pointing out the willingness of the administration to help banks which triggered the financial crisis, but is unwilling to directly provide help for beleaguered taxpayers.
However, the doors are still not closed and Chairman Sheila Bair will be engaging in fresh discussions with U.S. Treasury Secretary Henry Paulson with hopes of gaining new grounds. Bair has also approached legislators from Congress for support. House Financial Services Committee Chairman Barney Frank is optimistic that the administration will change its stance on the foreclosures reduction program and TARP funds could finally be released. House Speaker Nancy Pelosi is also supporting the FDIC mortgage modification proposal.
Chairman Sheila Bair has expressed the urgency of the situation as the increasing number of foreclosure homes have resulted to a negative impact to the housing market in terms of the reduction of median home prices. According to Bair, the market has started to overreact, calling for the need to stem this flow of foreclosures.
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