The FDIC has whipped up a new proposal that would allow the Treasury Department to modify approximately one million loans for at-risk borrowers who are currently underwater on the mortgage.
The so-called Home Ownership Preservation (HOP) loans would pay down unaffordable mortgages by up to 20 percent and restructure them into 30-year fixed mortgages, splitting the loan balance into two separate loans (combo loans).
Mortgage investors would pay the first five years of interest due on the HOP loans to the Treasury (while borrowers pay their reduced balance loan), at which point borrowers would take over and pay down both their modified loan and the HOP loan at fixed Treasury rates.
So essentially borrowers would receive a lower mortgage rate and a reduced mortgage balance, leading to a lower monthly mortgage payment, but they’d actually pay the entire original loan balance in full over time.
To join the new loan program, mortgage investors would pay the Treasury’s financing costs and agree to terms that would ensure the new loans extended to borrowers were affordable.
The Treasury would have a “super-priority interest,” meaning if the borrower defaulted, refinanced, or sold the property, the Treasury would have priority in terms of recovery of the loan proceeds.
The restructured mortgages cannot exceed a front-end debt-to-income ratio of 35 percent for all housing related expenses, and prepayment penalties, deferred interest, and negative amortization are all “barred.”
The program would apply only to unaffordable loans, defined by front-end DTIs exceeding 40 percent at origination, which are below the FHA conforming loan limit and were originated between January 1, 2003 and June 30, 2007.
The FDIC believes a Treasury public debt offering of $50 billion would be enough to cover the loan modifications of roughly 1 million loans that were “unsustainable at origination.”