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14 November 2008

FDIC proposes a plan to modify loans

The FDIC, in a break from Bush Administration's official stance, posted a proposed plan on its website to use TARP monies to restructure 2.2 million mortgage loans. Two days earlier Secretary Paulson rejected the idea to use funding from the $700 billion bailout monies.

The Treasury says they are aggressively searching for a solution to reduce escalating foreclosures. The Treasury says that use of the bailout money is to eventually bring a return to the Federal Government and the FDIC proposal does not meet this requirement, it's just a spending proposal.

The FDIC's plan would guarantee the 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.

FDIC Chairwoman Sheila Bair says that the housing market will enjoy more stability if we can avoid more foreclosures.

FDIC says that the lending industry will be more willing to back the loan modifications because taxpayers will absorb half the losses if the borrower defaults again. Also, loan servicing companies would be paid $1,000 for each loan they modify.

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