The Chair of the Federal Deposit Insurance Corp. (FDIC) Sheila Bair believes the government can save certain borrowers trapped in unaffordable mortgages by implementing a loan program that would allow the homeowners to pay up to 20-percent of their principal, Bair said in an editorial published in the Financial Times.

Bair says the U.S. Treasury, with the support of Congress, could help support the loan program, but believes the aid should be restricted to borrowers who meet certain requirements.
“Government efforts should focus on helping the market reach equilibrium without overshooting,” Bair said. “However, it is questionable whether government programmes can, or should, help borrowers who view homeownership as a leveraged investment. Solutions should focus on those with a long-term commitment to remaining in their homes and paying their mortgages if they had an affordable payment.”
Bair says a loan program to help borrowers would alleviate the many challenges borrowers trapped in unaffordable mortgages face.
“Participating mortgage lenders would be required to restructure the mortgage to ensure an affordable, long-term payment and subordinate their lien interest – the right to retain possession of the property – to the government’s claim,” she said. “To give borrowers time to stabilize their finances and rebuild some equity, repayment of the Treasury loan would be delayed for five years and then amortized over the remaining life of the mortgage.”
Bair said debt-to-income ratios would be used to determine which borrowers qualify.
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