FDIC Loan Modification Plan

The Federal Deposit Insurance Corp, the federal agency that insures most US bank deposits, unveiled a plan Friday that it believes will prevent 1.5 million foreclosures. The plan give mortgage servicing companies incentives to provide loan modifications using a "systematic and sustainable process."

The incentives include $1,000 per modified loan to cover expenses and sharing up to 50% of losses incurred in the event that a modified loan subsequently re-defaults.

To be eligible, borrowers need to have missed at least two payments for a home that they occupy. Servicers would be expected to lower monthly payments to 31% of the borrower's month income. The FDIC has projected that the program would reduce the number of foreclosures by 1.5 million at a projected cost of $24.4 billion. Full details of the plan are posted on the FDIC website.

The plan was unveiled by FDIC chairwoman Sheila Bair. She has already used a similar plan at Indy Mac, which the FDIC took over this July. Bair wants to use some of the $700 bailout approved by Congress to fund broad implementation of her loan modification plan.

So far the Treasury Department has backed away from supporting Bair's plan on the premise that the $700 billion should be invested with the hopes of getting the money back. The plan proposed by the FDIC is fundamentally different than the purpose of the bailout.