The Housing Chronicles Blog: Happy Valentine's Day, taxpayers! Just for you: a banking bailout!

Thursday, February 14, 2008

Happy Valentine's Day, taxpayers! Just for you: a banking bailout!

Over the past few weeks, we've continued to hear rumors of banks running to the federal government to bail them out. Now it's becoming more of a reality than a simple rumor, as reported in the WSJ. Intending to dump most of the problems at the feet of the Federal Housing Administration created during the Great Depression, bankers are eying two different strategies to help salvage their mortgage-related balance sheets: have the FHA guarantee refinanced loans at risk of or already in delinquency, and create a common method to write down loan balances that are above the the falling value of homes:

The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.

Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs the FHA, and other policy makers to discuss the proposal...

Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.

Several lenders are already considering the move, known as a "principal charge off," but are hesitant to move forward. Loan servicers -- the companies that collect monthly mortgage payments -- worry that if they take big write-offs, they might be sued by investors who hold mortgage-backed securities. However, if the industry came forward with a standard backed by the Treasury Department, the legal concerns would likely fade...

The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association.

The FHA was created during the Great Depression and provides mortgage insurance for qualified borrowers. The agency grew less popular during the recent housing boom because credit was widely available, but it has recently rebounded as some credit markets have dried up. Homeowners with FHA insurance pay premiums into an insurance fund...

Officials from J.P. Morgan Chase & Co. are pulling together their own proposal to expand the number of homeowners who could refinance into FHA-backed loans.

Just a few months ago, such proposals would have been considered far-fetched, but these and other unorthodox ideas are gaining credibility.

After all, it IS an election year.

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