April 29, 2008

By Krishna Guha and James Politi (View author info)

The US should fight the housing crisis by using low-cost government loans to help borrowers pay down unaffordable mortgages, Sheila Bair, one of the country's top banking regulators, proposes. Writing in the Financial Times on Wednesday, Ms Bair, chairman of the Federal Deposit Insurance Corporation, says the new government loans should cover up to 20 per cent of the value of the existing mortgages. These loans, which would be interest-free for the first five years, would be used to pay down part of the existing mortgage. In return for the cash, lenders would reduce payments on the remaining part of the mortgage to affordable levels, defined as a proportion of income. They would also pay a fee to cover the government's funding costs over the initial five-year period. Ms Bair said her plan posed little risk to taxpayers because the government would be repaid first if the borrower defaulted. "You would not have the same type of credit exposure that you have with FHA," she said. Some economists believe negative equity is a bigger problem than unaffordable monthly payments. But Ms Bair said: "For most of these mortgages, if you can make them affordable, then people will want to stay in their homes and ride it out."

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