A letter sent from U.S. Senate Banking Committee Chairman Christopher Dodd to Senate Majority Leader Harry Reid revealed details of a proposal to set up a government-sponsored entity to buy troubled mortgages.
“The new mortgages would be new 30-year fixed-rate mortgages, ensuring long-term stability for homeowners and the housing market,” Dodd said in the letter.
He explained that the government could buy the mortgages at a “steep discount” based on current market values, and then refinance them into government-backed loans.
“The discounts would then be passed on to homeowners in the form of new, lower-balance mortgages insured by (the Federal Housing Administration) or backed by the housing government-sponsored enterprises,” Dodd added.
Dodd projected an initial cost of $10 billion to $20 billion to fund the program, which would then be supported by its loan portfolio.
“The difference between the old mortgage and the new mortgage would be sufficient, after initial capitalization, to fund the program and cover possible losses,” Dodd wrote.
The idea, which Dodd said was not part of the temporary stimulus package, would be part of the long-term solution to tackle the current mortgage crisis.
Ideally, it would help homeowners stay in their homes without a total bailout, while protecting banks and mortgage lenders from massive losses tied to outright foreclosure.
It could also alleviate pressure currently piled on government financiers Fannie Mae and Freddie Mac.
The tricky bit of the plan will be determining which loans qualify as severely distressed, an issue complicating efforts extended by the Hope Now Alliance.
Dodd also mentioned that he wants to see an increase in the conforming loan limit as part of the economic stimulus package, along with a FHA loan reform bill.