WASHINGTON — A key federal regulator released a proposal to address the mortgage crisis Wednesday, calling on the Treasury Department to help troubled borrowers by lending them 20% of their mortgage principal to spur refinancing into more affordable loans.
Chairwoman Sheila C. Bair of the Federal Deposit Insurance Corp. said she was prompted to offer the plan in part by meeting worried borrowers at a housing forum in Los Angeles last week. The crowd of "anxious people" overfilled the auditorium and stretched down the block, she said. "I didn't see a lot of loan flippers or condo speculators," Bair told reporters.
Under Bair's proposal, Treasury would lend more than 1 million borrowers 20% of the amount of their original mortgage to assist in refinancing the remaining 80% at more affordable terms than their current mortgage offers. The government loan would be interest-free to the borrower for five years, with the owner of the original loan making the interest payments.
After that, the borrower would pay enough to retire both loans over the remainder of the term.
The program would be limited to loans that were clearly unaffordable for borrowers at the time of origination, Bair said. Congress would have to approve the plan, which would require Treasury to issue $50 billion in debt.
Bair said the proposal would not cost the government money over the long term because borrowers would eventually repay the Treasury loan. And mortgage holders would have an incentive to refinance current mortgages because they would get 20% of the loan value upfront, even though they would make less in interest over the term of the loan.
The Mortgage Bankers Assn. had no immediate reaction to the proposal. Neither did the White House or Treasury Department.
Both the White House and Treasury indicated that their priority would be to pass legislation in the works -- particularly reform proposals for the Federal Housing Administration and mortgage holders Fannie Mae and Freddie Mac.