TOPICS > Economy

FDIC Meets Resistance to Homeowner Aid Proposal

November 14, 2008 at 6:15 PM EDT
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To prevent 1.5 million U.S. homes from facing foreclosure, the Federal Deposit Insurance Corp. made a proposal Friday for lenders, backed by the government, to modify struggling borrowers' loans. A New York Times reporter discusses the agency's plan plus resistance from banks and the Treasury.
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JIM LEHRER: Help for homeowners in trouble was also the focus of a new proposal from the FDIC today. Margaret Warner has that story.

MARGARET WARNER: The proposal, laid out on the FDIC’s Web site today, would modify more than 2 million at-risk mortgages. Lenders would agree to modify the terms of loans for struggling borrowers to reduce their monthly payments.

In exchange, the government would guarantee to cover half of the lender’s loss on homeowners who defaulted eventually anyway. The proposal would cost roughly $24 billion.

It’s being promoted by FDIC Chairman Sheila Bair over the opposition of Treasury Secretary Paulson.

Here to tell us more about the idea and its prospects, we turn to Charles Duhigg, who has been covering the housing crisis for the New York Times.

And, Charles, welcome.

You heard — I think you could hear that tape, the Treasury official, Kashkari, saying they’re doing all they can for homeowners. What’s the essential difference you take away from the approach that Sheila Bair is advocating versus what Treasury and Fannie and Freddie have been doing?

CHARLES DUHIGG, New York Times: There’s a basic debate going on right now in Washington, D.C., between whether Wall Street should be helped or homeowners should be helped.

The truth is that Wall Street has been very easy to demonize. They made a lot of money over the last decade. But there’s a general agreement that Wall Street, the health of Wall Street and the health of banks, is essential in repairing the economy.

On the other hand, homeowners are very easy to sympathize with. A number of people are being foreclosed on. They’re being kicked out of their homes. But it’s less clear that any individual homeowner or even large groups of homeowners are essential to the nation’s economic health.

And so there’s a debate going on right now about whether the U.S. government should be using taxpayer dollars to help banks and Wall Street or whether we should be helping homeowners stay in their homes.

FDIC proposes homeowner help

MARGARET WARNER: So this proposal would, essentially, try to incentivize or pressure banks to modify the terms of these loans on a fairly standardized basis?

CHARLES DUHIGG: Absolutely. That's exactly what it would do. It would go to banks, and it would say to them, "If you have a loan that's 60 days overdue, we would like you to work with the homeowner in order to modify that loan so that they can afford to stay in their house."

If you're paying, say, 35 percent or 40 percent of your monthly income for your mortgage, they're going -- the bank would work you to bring that down to 31 percent.

Now, there's a cost associated with that. Some people are going to modify their loans, and they're still going to end up getting foreclosed on and not paying off those loans.

So what the government has said to banks is -- or what Ms. Bair at FDIC is proposing is that the government would encourage banks, to say, "Go ahead and modify these loans anyways. And if the person ends up defaulting, we'll split the cost of that default with you as an incentive for you to try and modify these loans and keep people in their houses."

MARGARET WARNER: Now, FDIC says they're going -- they're going to try to get 2.2 million mortgages modified. And then they say that will save 1.5 million foreclosures. What's their calculation there?

CHARLES DUHIGG: Well, what they're estimating is that there are about 4.4 million loans right now that are not owned by Fannie Mae or Freddie Mac that are 60 days overdue, and about 50 percent of those would qualify for the FDIC's proposal.

Now, about a third of those that qualify, about 2.2 million loans, a third of those, the homeowner is probably going to end up defaulting anyway. It doesn't matter how much you change their loan; they're not going to be able to afford it and they're going to go into foreclosure.

But the FDIC believes there's about 1.5 million households that would be able to stay in their homes if the loan was sufficiently modified.

Reactions from the banks

MARGARET WARNER: Now, tell us about the banks' reaction. It's been reported that they feel rather cool towards this idea. Why?

CHARLES DUHIGG: There's a lot of -- it's a difficult position that banks are in, because they're dealing with a lot of pressures.

On one hand, there is a genuine desire on their part, I think, to try and modify loans so that people can stay in their homes. But a loan modification has an inherent risk in it.

If you're bringing down the interest rate, you're going to make less money off of that loan, and so they're being asked to basically make less money in the short run so that more people can stay in their homes.

In addition, there's a lot of other parties that are sitting at the table who have a vested interest in how loans get modified. A lot of the subprime and Alt-A loans, the troubling loans over the last couple of years, were sold to other investors. It's called securitization. And the terms of a lot of that securitization prevent modifications.

Now, the FDIC says that they believe that they can overcome some of those problems. They can interpret the law in such a way that investors would be supportive.

But there's a lot of people with competing agendas at the table, and banks don't want to get in the middle of them, because they're afraid they're going to get sued.

MARGARET WARNER: Now, Sheila Bair says this plan would work better than what the banks are doing themselves. The banks say, "We're already renegotiating or modifying mortgages on a case-by-case basis."

What's her evidence? On what basis does she think this would work better?

CHARLES DUHIGG: The evidence that they're using is that, although banks have announced modification programs, they have been somewhat slow over the last couple of months to have a lot of impact.

So the numbers that Ms. Bair cites is that only four percent of seriously delinquent loans have been modified each month. And my impression from talking to FDIC is that there are some within the agency who feel that banks are not pursuing this as aggressively as they should be or as they might if there was an additional incentive, namely, the government being willing to foot part of the bill.

Opposition from the Treasury

MARGARET WARNER: Now, what's at the root of Treasury Secretary Paulson's opposition to this? Because she's been lobbying him for a year to do something like this.

CHARLES DUHIGG: Right. And this is -- we're seeing a real split within the Bush administration. Sheila Bair was appointed by the White House, although they have distanced themselves from her. Hank Paulson, obviously, is very closely aligned with President Bush right now.

What the Treasury Department says is that they say two things. First of all, they say, when they go and they help banks right now, they're not just giving the banks grants. They're making investments, and they're using taxpayer dollars to do that, and they expect to get a lot of that money back. So they're trying to minimize the risk for taxpayer dollars.

On the other hand, Ms. Bair's plan and what she's proposed, would basically be a grant. There's just a number of taxpayer dollars that would go out the door that we would never -- that would never come back.

And Mr. Paulson has consistently said that he wants to make choices that do not put taxpayer dollars at risk where they might not be repaid.

The other thing that's important here is that there's a basic issue of priority, as you indicated earlier in the show, which is that, within Treasury, they're very, very focused on returning health to the economy and stabilizing Wall Street and banks.

And what they say is, listen, homeowners don't matter as much as banks do right now. We have to deal with getting the banking system back to normal and with getting the economic climate back to normal. And as sympathetic as we might be to homeowners, they don't play as large a role in that as do, say, Wall Street CEOs.

MARGARET WARNER: So, Charles -- oh, sorry. So what are the politics here, before we end? In other words, why is Sheila Bair coming out publicly now in opposition to the treasury secretary?

CHARLES DUHIGG: I think -- well, the politics are that there's a brand-new president who's taking over pretty soon, and there's a lot of discussion about what can -- what is the Bush administration and Mr. Paulson going to be able to do before the new Congress and the new president takes over? And how much of it is going to be overturned?

Ms. Bair is not closely aligned with the White House right now. Someone has suggested to us that she feels like -- or hopes that there might be a place for her within the Obama administration, potentially in the position she holds right now, which is a five-year term and she's only a few years into it.

And so what we're seeing right now is essentially a debate between what is traditionally a Democratic viewpoint -- which Ms. Bair happens to be kind of embodying at this moment -- and a Republican viewpoint, which voters said in the last election that they don't agree with.

And Republicans are trying to figure out how much they can do without running the risk of making America angry.

MARGARET WARNER: All right, Charles Duhigg from the New York Times, thank you.

CHARLES DUHIGG: Thank you.