Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair surprised Congress with a proposal bypassing the Federal Housing Administration to make use of the Treasury as a financial resource for cash strapped mortgagees. The low cost “gap” financing would help to reduce the principal balance on a loan as much as 20 percent over the next five years. Ms. Bair announced the plan at the end of April 2008, just as the House and Senate were negotiating with the FHA for a proposal that would assist the troubled homeowners with their unaffordable mortgages.

Ms. Bair’s plan would be limited to those borrowers who are determined to stay in their homes and avoid foreclosure proceedings and wouldn’t cost the Treasury anything as the five years worth of interest would be paid up front by participating lenders. The borrower would then begin to pay down the principal with no interest for five years. After five years, the borrower would begin to pay off the FDIC loan at the low Treasury rate for the rest of the mortgage. The mortgage would hold a lien on the property and it would be paid off first should the borrower sell or succumb to foreclosure.

The program would be limited to those borrowers who could qualify for a lower fixed rate mortgage. The home owner’s mortgage lender would apply for the gap loan on the home owner’s behalf.

The idea is to lower the borrower’s debt-to-income ration to a more manageable 35 percent and to take advantage of lower Treasury borrowing rates to assist homeowners into more affordable fixed-rate loans. This plan is not for everybody, but Ms. Bair thinks it could make a difference for up to a million homeowners who don’t qualify for any other relief plans. It’s certainly something worth looking into.