FDIC floats plan to help 1.5 million avoid foreclosure

By The Associated Press

WASHINGTON — The Federal Deposit Insurance Corp. proposed Friday to use $24 billion in government funding to help 1.5 million American households avoid foreclosure, a move that breaks with the Bush administration's official stance.

The FDIC posted the plan on its Web site two days after Treasury Secretary Henry Paulson rejected the idea of using money from the $700 billion bailout of the financial industry to pay for such a proposal. A Treasury spokesman declined comment Friday.

The agency's plan would guarantee 2.2 million modified loans - mainly risky loans made to borrowers with weak credit or small down payments - through the end of next year. Borrowers would get reduced interest rates or longer loan terms to make their payments more affordable.

"If we can avoid those foreclosures, then you will get more stability in the housing market," said Michael Krimminger, a senior adviser to FDIC Chairman Sheila Bair, said in an interview Thursday.

The FDIC says the government's backing will make the lending industry more willing to modify loans because taxpayers will absorb half of the losses if the borrower defaults again. Also, loan servicing companies, which collect and distribute mortgage payments, would be paid $1,000 for each loan they modify.

Even if a third of borrowers default again on their modified loans, 1.5 million homes would still be saved, the FDIC says. Under the agency's plan, monthly payments shouldn't total more than 31 percent of homeowners' pretax monthly income.

The FDIC says its plans should apply to an estimated 4.4 million loans that are likely to become delinquent though the end of next year.

The agency has been an aggressive proponent of efforts to alleviate the foreclosure crisis. FDIC officials sounded early warnings about a rise in defaults among risky loans, and have repeatedly reaped praise from Congressional Democrats.

Read tomorrow's Arkansas Democrat-Gazette for full details.

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