WASHINGTON — The government is considering a plan that would help around 3 million home owners avoid foreclosure, sources briefed on the matter said.
A final deal had not been reached as of Wednesday afternoon, and negotiations could still fall apart, but government agencies were contemplating using around $50 billion from the recently passed bailout of the financial industry to guarantee about $500 billion in mortgages.
The plan could include loan modifications that would lower interest rates for a five-year period, said two people briefed on the plan, who asked not to be identified because details were still being worked out and the plan was not yet public.
The plan would be the most aggressive effort yet to limit damages from the U.S. housing recession, which has shaken global credit markets.
More than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 had started the foreclosure process, according to the most recent data from the Mortgage Bankers Association.
The government’s program would be run by the Federal Deposit Insurance Corp. The agency’s chairman, Sheila Bair, said last week she was working “closely and creatively” with the Treasury Department on such a plan but revealed few details.
Andrew Gray, an FDIC spokesman, said it would be “premature to speculate about any final framework or parameters of a potential program.”
Treasury Department spokeswoman Jennifer Zuccarelli called details of the loan-modification plan “simply inaccurate.”
She said the Bush administration “is looking at ways to reduce foreclosures” but has not decided on a final approach.
It was unclear what role Fannie Mae and Freddie Mac would play in the government’s sweeping plan.
But Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, said in a statement Wednesday that “federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes.”
What next?
Ratcheting the Federal Reserve’s key rate from the current 1 percent down to zero can’t be ruled out. What some observers are saying:
“If conditions deteriorate considerably, the Fed could go down to zero. It is absolutely a possibility, but I don’t believe it is likely.”
Richard Yamarone, Argus Research
“The problem is not the interest rate. It is that no one is willing to loan, regardless of what the rate is. Lower rates will not make the problem go away.”
Sean Snaith, University of Central Florida economics professor
“The economic damage of the financial panic has already been done, and the Fed is trying to limit the damage as best it can.”
Mark Zandi, Moody’s Economy.com
