Paulson ‘Supports’ FDIC Foreclosure-Prevention Plan

By Matthew Cover | November 18, 2008 | 8:29 PM EST

Treasury Secretary Henry Paulson, left, and Federal Reserve Chairman Ben Bernanke arrive on Capitol Hill in Washington, Tuesday, Nov. 18, 2008, to testify before the House Financial Services Committee. (AP Photo/Evan Vucci)

( – Treasury Secretary Henry Paulson supports the idea of a foreclosure-prevention plan that could put the government on the hook for 50 percent of a mortgage-servicing company’s loss should it renegotiate a bad mortgage -- and the renegotiation fails. 

But he doesn’t want to use TARP (Toxic Asset Relief Program) money – the $700 billion bailout money Congress approved before the election – to pay for it.

On Tuesday, Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair told members of the House Financial Services Committee that $24 billion of the bailout funds should be used to prevent families from losing their homes from foreclosure. She warned that it is "essential" for the Treasury Department to offer loan guarantees and credit to help keep people in their homes.

Bair’s plan, however, is that Treasury take over a loss-sharing “foreclosure-prevention plan” already in place at FDIC – one that commits the federal government to pay for 50 percent of a bank’s losses if it renegotiates a customer’s mortgage – and the customer defaults again. 
But Paulson, who also appeared before the House panel Tuesday, deflected criticism from House Democrats, who had complained that none of the $700 billion approved for the bailout was going to stop mortgage foreclosures -- and who were championing Bair’s plan. 

"The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it,” Paulson said in his testimony. “It is not a panacea for all our economic difficulties. The crisis in our financial system had already spilled over into our economy and hurt it." 

Treasury Department spokesman Jennifer Zuccarelli told that Paulson, in fact, favors the FDIC’s IndyMac plan as a concept -- and that Treasury is reviewing it as part of its efforts to establish a “foreclosure-mitigation plan.”

“He supports the IndyMac model,” Zuccarelli said. “It’s a plan that we’re reviewing.”

The IndyMac model, which came about in the aftermath of FDIC’s seizure of the assets of the failing IndyMac bank in July, incorporates a loss-sharing program in which the FDIC agrees to pay mortgage-servicers 50 percent of any loss they take from a mortgage loan that goes into default after being renegotiated.

FDIC estimates that the loss-share plan would cost $24.4 billion, according details on its Web site. FDIC said that it would be willing to serve as a contractor for Treasury, should it implement the plan. 

Paulson, in fact, had previously indicated support for the loss-share idea, which he said provides an incentive to mortgage companies to renegotiate mortgages.

“I believe it is an important idea,” Paulson said on Nov. 12. 

The FDIC says that the loss-sharing plan would encourage loan modification on a broad scale.

“A loss share guarantee on re-defaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification,” the plan said.