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2.7%  Q1 GDP    4.57%  avg. 30-year mortgage     9.5%  Unemployment

FDIC, Treasury Still Working Out Details of Loan Program

Shiela Bair, chairman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that the government may offer loan guarantees and other incentives to encourage mortgage lenders to renegotiate the terms of troubled loans.

Sen. Chris Dodd (D-Conn.) asked whether the FDIC has the capacity to handle this program. Bair said the Treasury Department would be in charge, and the FDIC would act as a contractor to help guarantee loans.

One big hurdle for private mortgage companies looking to restructure loans is that no industry-wide framework has been established to guide the process. "They've been doing it ad-hoc," she said.

Neel Kashkari, the interim head of the government's $700 billion rescue effort, said the Treasury Department is still in the "policy process" of figuring out how the program would work.

Dodd emphasized a sense of urgency. "There are more than 10,000 foreclosures a day," he said. "I hope there's a deep appreciation that we need to get this moving."

Update 11:52 a.m.

A report out today about foreclosure filings from firm RealtyTrac said there were 265,968 foreclosure notices reported in September, a 12 percent decrease from August figures but a 21 percent increase from a year ago. The firm said one in every 475 U.S. housing units received a foreclosure filing in September.

At the hearing, Sen. Mike Crapo (R-Idaho) said he's concerned that the program could mean that "financial institutions are increasingly disconnected from the risk of lending."

Bair said the temporary nature of the program is the key to preventing private banks from depending on federal help for all of loans. The federal assistance would end Jun. 30, she said.

Crapo also asked how the servicing of the loans would be handled. Would they need another layer of bureaucracy?

Kashkari said the restructured loans would be handled by the banks themselves, but with "very specific instructions consistent with our objectives."

Although the program is first focusing on the residential housing market, there is a possibility it could be extended to the commercial real estate market as well.

Meanwhile, RealtyTrac reported that U.S. foreclosure filings increased 71 percent in the third quarter from a year earlier, reaching the highest on record.

A total of 765,558 U.S. properties got a default notice, were warned of a pending auction or were foreclosed on in the quarter, the most since records began in January 2005.

--Kim Hart

By Kim Hart  |  October 23, 2008; 11:15 AM ET
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They need to foreclose. If they don't the lenders get more burned than they got making the loans to begin with. If somebody owes you 100K and can't make payment, all you can do is collect the collateral. It's like a car loan. You buy a car for 20K, don't pay and the flatbed truck comes for the car. You can't just say, keep the car and keep the house we'll keep the loss. It would be nice to keep all this property and get a free car in on the deal. I don't know what the details will turn out to be. If somebody lost 50K, it's not as if the government can just give everybody 50K because they are nice guys. If the bank won't loan you money, how is the government giving you money going to work?

Posted by: Anonymous | October 23, 2008 11:50 AM | Report abuse

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