Officials at the Federal Deposit Insurance Corp. yesterday detailed a plan to prevent 1.5 million foreclosures in the next year by offering financial incentives to companies that agree to sharply reduce monthly payments on mortgage loans.
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Agency officials estimated the cost to the government at $22.4 billion.
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The mortgage industry is concerned that any new modification plan will persuade some people to stop making mortgage payments in addition to helping people who already have stopped making payments. The industry argues this will translate into higher interest rates because investors will demand compensation for the increased risk of loan defaults. That, in turn, would limit the number of people who can afford mortgage loans.
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FDIC estimates that 1.4 million borrowers with such loans are at least two months late on their payments, and another 3 million borrowers will miss at least two payments by the end of next year. The agency estimates that half those borrowers, or about 2.2 million people, would receive a loan modification under the program, and that about 1.5 million will successfully avoid foreclosure.

Under the terms of the proposed FDIC program, lenders would reduce monthly payments primarily by cutting the borrower’s interest rate to a minimum rate of 3 percent. If necessary, the company could also extend the repayment period on the loan beyond 30 years, reducing each monthly payment. Finally, in some cases, companies could defer repayment of some principal. The borrower still would be on the hook for the full value of the loan.

Officials said their experience at IndyMac showed that principal reductions were not necessary. So far, FDIC has modified about 20,000 IndyMac loans. In 70 percent of the cases, FDIC was able to create an affordable payment solely by reducing the interest rate. In 21 percent of the cases, the agency also extended the life of the loan. In 9 percent of the cases, it delayed repayment of some principal.