Feds May Be Considering Subsidy on Troubled Mortgages

When it comes to the idea that Treasury’s TARP funds may be used to manage a bailout of troubled mortgages, all options are still on the table, and the only thing that most of us really know is that the plans under consideration have been stuck in the negotiating room for some time.

The Wall Street Journal suggested in coverage Monday that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush administration’s last attempt to forestall sliding home prices.”

One plan that may be garnering some consideration is the idea of a federal subsidy for troubled borrowers, perhaps tied to an effort to modify loans. A source near Democratic senator Robert Casey’s office in Pennsylvania forwarded us a copy of a memo on Sunday evening, said to have sparked some of the ongoing negotiations now taking place, although HousingWire could not obtain further details. The memo outlines a proposed bailout that would use three-year subsidies for some troubled borrowers.

The subsidy plan represents the thoughts of Assured Guaranty Ltd (AGO: 12.05 -4.82%) CEO and president Dominic Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier. A spokesperson at Assured confirmed the authenticity of the memo on Monday evening, but stressed that Frederico’s input wasn’t the only advice sought by legislators looking for a solution to the nation’s foreclosure mess.

“We assume others were being asked for their input related to this issue,” said Ashweeta Durani, vice president for global communications at the firm. Frederico “was asked for his personal opinion [on] how the government might improve its response to the problems caused by high mortgage delinquencies,” she said.

Sen. Casey’s office had not yet commented on the memo officially when this story was published. The Pennsylvania Democrat sits on the Senate Banking Committee chaired by Christopher Dodd (D-CT).

The proposal outlines the mechanics of a mortgage bailout that would cost as much as $441 billion, relying primarily on a three-year borrower subsidy that would be repaid in five years, with interest. “Upon receipt of a notice of default on an owner-occupied primary residence, a homeowner could apply to participate in a program under which the government would fully subsidize three years’ mortgage payments in exchange for a note, to be paid in a lump sum five years from receipt of the first payment subsidy, equal to the payment subsidies plus interest accrued at the federal funds rate,” reads the proposal, in part.

“In five years’ time, participants would, in all likelihood, be able to sell their homes or refinance their mortgages at amounts that would allow them to repay the loan.”

Only one of many options
A few of HW’s sources on Capitol Hill suggested the general idea of a borrower subsidy is only part of what is now being discussed among Administration officials and legislators; key Democrats are said by our sources to be pushing hard for such a measure as a way to push bailout dollars directly to borrowers, after what they see as a handout to Wall Street firms needing capital.

The plan is also just one of the options being tossed around by legislators, we were told by a lobbyist on Capitol Hill with knowledge of ongoing negotiations. The newest idea now being considered is one that would see the role of the U.S. Department of Housing and Urban Development further expanded by relaxing criteria for FHA’s newly-minted Hope for Homeowners refinance program.

A report at American Banker on Monday evening suggested that officials are considering a new proposal to reduce the haircut needed to participate in the Hope for Homeowners program; investors must currently take a minimum 13 percent loss relative to current LTV to put a loan into the H4H program (actual losses are likely to be much greater, given the current LTV requirement). The report suggested regulators may move that loss level down to as low as 3 percent in order to encourage greater participation.

As HW reported last week, investors are so far reluctant to participate in the program, and many mid-tier lenders are finding themselves locked out of H4H altogether based on requirements from warehouse funding sources.

Write to Paul Jackson at paul.jackson@housingwire.com.