Foreclosure filings -- default notices, auction sale notices and bank repossessions -- fell by 12 percent from August to 265,968 in September, according to RealtyTrac, which records property in various stages of foreclosure.
In view of these souring conditions, Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., told the Senate Banking Committee that her agency and the Treasury Department are working closely to find ways to prevent avoidable foreclosures. The plan would use the Treasury Secretary's new authority under the Emergency Economic Stabilization Act to provide guarantees to mortgage lenders.
"Loan guarantees could be used as an incentive for servicers to modify loans," Bair said. "Specifically the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."
That way, she said, "unaffordable loans could be converted into loans that are sustainable over the long term."
Americans have made it clear they are not happy that the $700 billion financial rescue package is focused so heavily on financial institutions and less so on helping homeownwers directly.
"Now that the administration has taken strong measures to stabilize financial institutions, it is imperative that we apply the same sharp and urgent focus to help the individual homeowners whose plight is at the root cause of this crisis," said Senate Banking Committee Chairman Christopher Dodd, D-Conn.
Bair, who worked with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke in crafting the financial rescue law, has been a longtime advocate of streamlining the modification process for homeowners who realistically have a chance of affording their mortgages once modified.
After the FDIC became conservator of mortgage lender IndyMac this summer, Bair instituted a loan modification process for loans that were 60 days or more past due and which IndyMac either owned directly or serviced. About two-thirds of the 60,000 loans under IndyMac's umbrella are considered potentially eligible for the new program, she said.
"Through this week, IndyMac Federal has mailed more than 15,000 modification proposals to borrowers and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures," Bair said. So far, more than 3,500 have accepted the offers and others are being "processed."
The modifications on average have cut borrowers' monthly payments by more than $380, Bair said.
Not all foreclosures are preventable since some homeowners still won't be able to afford their homes, even under modified loan terms. Bair said the loans being modified at IndyMac must provide "improved value" for the bank or for the investors who own the loans.
She added that she hoped the IndyMac modification program will serve as a "catalyst" for more loan modifications around the country.
Other witnesses at Thursday's hearing include Neel Kashkari, the Treasury's interim assistant secretary for financial stability; Brian Montgomery, the assistant secretary for housing at the Department of Housing and Urban Development; James Lockhart, director of the Federal Housing Finance Agency; and Elizabeth Duke, a member of the Federal Reserve Board of Governors.
Kashkari is leading the Treasury's efforts under the $700 billion bailout to buy mortgage-backed securities and invest in banks. He said Thursday that Treasury "will look for every opportunity possible to help homeowners" as it carries out the plan.