Feds' lifeline to sinking borrowers could save homes

WASHINGTON — Whether you see it as an exorbitant taxpayer bailout of Wall Street and the banks — or you're cheering from the sidelines — you can agree: The federal moves to rescue the mortgage system could have huge impacts on individual consumers in the months ahead.

Even the chief architect of the plans, Treasury Secretary Henry Paulson, says the costs could run into the "hundreds of billions" — and that inevitably means higher taxes somewhere down the line.

On the other hand, Paulson argued persuasively to Congress that the costs of not acting — and allowing the global financial system to unravel day by day — would cost taxpayers much more.

The jury will be out on that for years. But for consumers — especially those looking for a new mortgage or who are deep in trouble on their house payments — the plan could have more immediate, life-changing effects. Here's why.

A key part of Treasury's plan requires no approval from Congress — pumping billions of dollars of fresh capital into the home-loan market through purchases of mortgage-backed securities.

The Treasury already is committed to inject $10 billion during this month alone and is expected to announce substantial purchases for an extended period.

Fannie Mae and Freddie Mac, now under federal conservatorship, also have been directed to accelerate their investments in mortgage securities.

The net effect should be to supply additional dollars for homebuyers and refinancers, and to keep a damper on interest rates. So far, so good: Rates for 30-year fixed-rate loans are under 6 percent.

A second key impact of the rescue plan addresses the dire situations faced by an estimated 5 million homeowners behind on their mortgage payments, and who often own houses worth less than the principal balances owed on them.

The new government-controlled entity that will purchase portfolios of troubled mortgage assets from lenders and bond investors is likely to take a different approach than the private sector to delinquent borrowers.

Rather than the slow, loan-by-loan modifications typical of banks — so-called "workouts" to lower rates, payments and even loan balances — the new entity is likely to adopt a fix-the-problem-in-bulk approach advocated by the Federal Deposit Insurance Corp., the regulator and insurer of federally chartered banks.

The FDIC has decades of experience handling the acquired assets of failed banks, including the giant IndyMac Bank, which went under in July.

IndyMac had 742,000 mortgages in its portfolio, 60,000 of which were 60 days delinquent or at some stage of foreclosure. One of the first actions the FDIC took after stepping in to pick up IndyMac's pieces was to declare an immediate halt to all foreclosure actions, pending a portfoliowide review.

The idea, according to FDIC Chairman Sheila C. Bair, was to whistle a timeout to "evaluate the problems and identify the best ways to maximize the value of the institution."

Simply pushing through scheduled foreclosures on the bank's delinquent customers would not achieve that goal because foreclosures are extremely costly to lenders and catastrophic financially for borrowers.

A smarter strategy, according to Bair, was to work out better terms for as many borrowers as possible, turning unaffordable, delinquent mortgages into affordable loans at current income levels.

The best way to do that in a large portfolio is not on a retail, loan-by-loan basis, she argued, but rather by using a "systematic" approach in which all delinquent borrowers who fit preset criteria could automatically qualify for loan modification.

After an initial review of the 60,000 late borrowers in the IndyMac portfolio, FDIC deemed roughly 40,000 customers eligible for the modification program.

Modification terms include rate reductions, the lengthening of payback terms, rescheduling unpaid principal and interest, rate caps, and other techniques.

In some cases, rates were reduced to 3 percent for five years, with increases of 1 percent a year until the note rate reaches a ceiling tied to current Freddie Mac 30-year rates.

Unlike private-sector servicers, the FDIC charges no fees for its modifications.

In the two months since taking over IndyMac, according to Bair, more than 7,400 modification proposals have been sent to delinquent borrowers and "thousands more" have received calls attempting to prevent "unnecessary foreclosures."

That sort of wholesale remedial strategy — including a halt to potentially hundreds of thousands of foreclosures — is what likely awaits financially distressed homeowners when the new federal rescue program kicks in and acquires their mortgages.

Call it what you want. But if you're one of those troubled borrowers, two words are likely to come to mind: home saver.

Kenneth R. Harney: kenharney@earthlink.net