Will a Gov't. Loan Modification Plan Work?

A government plan allowing "modification" of mortgages could help 3 million.

ByABC News
October 30, 2008, 2:01 PM

Oct. 31, 2008 — -- Denise Harris is worried about her children. Since her divorce, it's been tough to make her mortgage payments and she's afraid that her family will soon have to move out of their Arizona home.

The children, ages 9 and 13, "don't want to move. They've gone through a divorce already and I wanted stability for our lives," Harris said, "but Mommy's got to find a creative way to make it work right now."

If the federal government offered a plan to help her modify her mortgage, Harris said, "it would mean everything."

Modifying loans is part of a new proposal now under consideration by the government, a person familiar with the matter told ABCNews.com. The proposal, by the Federal Deposit Insurance Corp., is similar to measures being implemented by the FDIC at the failed California-based bank IndyMac.

Unlike a previous government mortgage relief plan -- the Help for Homeowners plan, which Congress approved in July -- the new plan isn't dependent on a lender's willingness to write down a loan's principal. Instead, other loan modifications are favored -- namely, lowering interest rates and lengthening loan terms.

In exchange for the modifications, the government would guarantee the loans.

Some experts say that, so far, it sounds like a good idea.

"When a real big financial bubble deflates, which is what we're in the midst of here. ... Any one thing you do is not going to be enough," said Alex Pollock, the former president of the Federal Home Loan Bank of Chicago and a resident scholar at the American Enterprise Institute. "You have to try different things and this is a reasonable thing [to] try."

According to published reports, a government loan modification plan could aid 3 million homeowners, would cost up to $50 billion and could be funded by the government's new $700 billion financial rescue package.

But officials at the Treasury Department said Thursday that it was too early to discuss specific proposals.

"No specific option has been decided on. It is premature to be assigning any specific figures or parameters to these proposals," said Treasury spokeswoman Brookly McLaughlin. "The administration and Treasury and FDIC and HUD [the U.S. Department of Housing and Urban Development] have been and continue to look for ways to reduce foreclosures. And the White House has a policy process to work through the different ideas, but no decisions have been made on any particular approach."