WASHINGTON -- The government would give emergency loans to 1 million troubled borrowers under a new housing assistance plan developed by a federal bank regulator.
Sheila Bair, the chairman of the Federal Deposit Insurance Corp., wants the government to make loans to borrowers with mortgages they can't afford, particularly those buyers who had high levels of debt when they originally took out their home loans.
Borrowers would use the money to pay down up to 20 percent of their outstanding principal balance, reducing their obligation to their lender and, in some cases, staving off foreclosure.
Bair unveiled the proposal, which needs approval by Congress, in an opinion piece in Wednesday's Financial Times.
In exchange for the federal loan, banks and other mortgage investors would restructure the remaining mortgage into fixed-rate 30-year loans with interest rates capped at national average rates, according to the FDIC proposal.
"Only the federal government is in a position to help arrest the downward cycle in housing markets by facilitating temporary aid to borrowers," the FDIC said in a fact sheet outlining the proposal.
The Treasury Department would sell $50 billion in debt to fund the plan. Payment of the government's loan would be delayed for five years.
If a borrower defaulted, the government would get paid off before the bank.
Mortgage investors would apply to the Treasury Department to participate in the voluntary program.
In theory, they would benefit because the loan would be less likely to default in the long run.
White House spokesman Tony Fratto said the Bush administration is "taking a look" at Bair's proposal.
Treasury Department spokeswoman Brookly McLaughlin said "we appreciate her concerns and the work she's done," but added that Congress' focus should be on long-delayed issues such as giving regulators more power over mortgage finance companies Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).
The proposal by Bair, a Bush administration appointee who acts independently of the While House and has been especially aggressive on the housing issue, comes as Democrats push their broader housing rescue plan on Capitol Hill.
The Democrats' measure, sponsored by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, would allow the Federal Housing Administration to take on up to $300 billion in refinanced loans for struggling homeowners. The FDIC said its proposal could complement that effort.