Bailout Plan

The government is expected to announce soon that it will devote up to $50 billion to directly address the source of the financial crisis: bad mortgages and millions of homeowners at risk of foreclosure. No decisions yet have been made on a number of housing proposals. New program would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments to affordable levels. In exchange the government would guarantee some percentage of each loan to backstop lenders if borrowers re-default on modified mortgages. The plan could help up to 3 million homeowners. The plan being considered likely would not require such a strict write down. Instead, it might require that the new payment for the borrower be affordable. Monthly payments can be made affordable by, among other ways, reducing the interest rate for a period of time or extending the term of the loan. Typically one way to determine affordability is to consider a delinquent borrower's debt-to-income ratio. At Indy Mac, which was taken over by the FDIC this summer, loans are being modified so that borrowers' new mortgage payment - including insurance and taxes - does not exceed 38% of their pre-tax income. The new government plan could offer lenders a way to reduce their losses on troubled loans. Lenders would have to modify the loan to make it affordable. Funding for the potential initiative would come from the $700 billion financial rescue package passed by lawmakers in early October. To date, most of the money from that package has been devoted to getting the credit markets going again. Details of the plan are still being worked out between the Treasury, the White House and the FDIC. The government and lenders are behind where they should be in terms of preventing avoidable foreclosures. And that while voluntary programs have been helpful, going forward there needs to be a package of incentives. On Thursday, the majority of Senate Democrats on the Banking Committee sent a letter to President Bush urging him to use the powers granted under the financial rescue package "decisively, aggressively, and swiftly to reduce foreclosures." The fact remains that the administration has not dedicated the time, attention or resources needed to address the cause of the crisis - the historic levels of foreclosure.