Sheila Bair’s Plan B

FDIC chairman Sheila Bair’s Plan A for modifying troubled mortgages is, by her own admission, not working out very well. But never worry, she’s got a Plan B:

One idea is to provide loans directly to troubled borrowers to pay down principal. For example, if you used $50 billion to pay down 20 percent of the principal on troubled mortgages, you could modify 1.1 million loans. So $50 billion, that’s a big number–but I’ve seen a lot bigger numbers. The stimulus package was $150 billion.

I don’t like this idea much. The $50 billion, in this case, is loans, not grants. If you’ve got a mortgage which has reset to a 10% interest rate, and then the government comes along and refinances 20% of it at say 5%, you’ll still be paying 10% on 80% of the former principal, and 5% on the other 20%. Which means that your new total interest payment would be 9% of the former principal. The government will have spent $50 billion, with the aim of shaving 10% off troubled borrowers’ mortgage payments? I don’t see this getting much traction.

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