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FDIC Announces New Plan to Prevent Foreclosure

The Federal Deposit Insurance Corporation (FDIC) presented a new loan modification program yesterday that would assist homeowners facing foreclosure. The proposal, which will be publicized later today, is aimed to assist borrowers who are at least two months behind in their mortgage payments.

Under this program, eligible homeowners would receive a loan modification that requires them to spend no more than 31% of their monthly income on housing expenses. Meanwhile, participating lenders are guaranteed that if the borrower falls behind on their payments post-modification, the federal government will cover up to half of the new losses, in most cases.

This FDIC plan has received praise from many lawmakers including Senate Banking, Housing and Urban Affairs Committee Chairman, Christopher Dodd (D-CT), who supported the proposal yesterday in a Full Committee Hearing. Those who support this plan believe it will endorse sustainable loan modifications and reach a wide realm of troubled homeowners at this critical time. The FDIC believes this program will be able to assist 2.2 million individuals with loan modifications and prevent 1.5 million foreclosures.

Meanwhile, opponents to this proposal do not wish to use part of the $700 billion given to the United States Department of Treasury from the Emergency Economic Stabilization Act (EESA) to fund this program. The FDIC estimates that if enacted, this program could cost the federal government $24.4 billion.

Earlier today, Interim Assistant Secretary for Financial Stability Neel Kashkari submitted written testimony for a hearing with the House Subcommittee on Domestic Policy, which suggested that Treasury Secretary Paulson has taken this plan under consideration.

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