New FDIC Plan Will Help Consumers of The Loan Modification Center

Washington, D.C. (PRWEB) January 12, 2009

Sheila Bair, who was named chairperson of the Federal Deposit Insurance Corporation (FDIC) in 2006, has reiterated her view that the very best approach to resolving the present housing crisis is to encourage lenders to renegotiate mortgages with home owners.

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Bair’s proposal calls for a loan modification plan so that payments are lowered to 31% of homeowners’ gross revenue (Sasseen &amp Francis, 2008). The federal government would guarantee to cover portion of the losses if the homeowners re-default in spite of this assistance. Bair claims that this strategy would save 1.5 million property owners and would cost the federal government around $ 24.four billion (Sasseen &amp Francis, 2008).

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The proposed method has faced a barrage of criticisms and doubts. Some have claimed that the renegotiation of millions of mortgage loans will take as well extended to have a practical effect (Wallison &amp Pinto, 2008). Others have pointed out that it will be difficult to renegotiate certain kinds of loans, specifically those that have been securitized, or sold to investors (Sasseen &amp Francis, 2008). Critics have also argued that earlier efforts to renegotiate mortgages have not been especially effective. Specifically, there is evidence that more than half of the mortgages renegotiated throughout 2008 are currently at least 30 days previous due (Sasseen &amp Francis, 2008). Treasury Secretary Hank Paulson argues that Bair’s plan is problematic because it increases government expenditures and it rewards banks when homeowners default (Sasseen &amp Francis, 2008).

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Alternative solutions have been proposed for the housing mess, but these as well have perceived flaws. For example, bailing out the major mortgage businesses may possibly basically encourage further risky practices in the future (Murphy, 2008). Treasury Secretary Paulson claims that the ideal approach is to minimize mortgage rates, in order to encourage much more residence purchases. However, this strategy has been criticized simply because it will not help borrowers who are already in difficulty (Sasseen &amp Francis, 2008). Martin Feldstein, a Harvard economist, has recommended that the federal government ought to make loans to troubled home owners to cover 20% of their mortgages (Feldstein, 2008). However, this raises the danger of borrowers, in turn, defaulting on their debts to the government (Murphy, 2008). There is, furthermore, widespread sentiment that assisting firms or borrowers who got themselves into difficulty is unfair to those who produced more reasonable financial choices.

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The housing crisis came about because trillions of dollars of mortgage loans had been created to borrowers who have been not actually able to repay the loans. Several of the loans had been primarily based on adjustable prices that tremendously increased the size of homeowner payments after a certain period of time (Murphy, 2008). The situation led to a expanding quantity of defaults and a substantial decline in housing values. The proposed options to the difficulty are primarily based on the question of whether it is better to help mortgage organizations or borrowers. There seems to be a partisan divide on this situation, since several Democrat politicians, such as Bair, are in favor of helping borrowers, whilst Republican leaders, like Paulson, are in favor of helping the large companies. In spite of this controversy, there is widespread agreement amongst policymakers that the most important step is to strengthen regulation of the housing industry and the mortgage business (Murphy, 2008).

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References&#13

Feldstein, M. (2008). How to help people whose residence values are underwater. Wall Street Journal (November 18), A21.

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Murphy, R. P. (2008). Can the Feds save the housing market? Freeman 58(5), 8.

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Sasseen, J., &amp Francis, T. (2008). A standoff over housing relief. Business Week (December 22), 30.

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Wallison, P. J., &amp Pinto, E. (2008). Let’s use Fannie to clean up the mess it produced. Wall Street Journal (October 25), A13.

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