Businesses solve problems by focusing on targets. Elizabeth Warren, Chair of the Bailout’s Congressional Oversight Committee told MSNBC, “Throwing $700 billion at a problem only works if you aim at the problem.” 
    The Treasury should act like firefighters in a home where furniture is burning, but the fire is fed by a gas leak. First put out the gas leak. The financial gas leak is securitized problem mortgages, which investors compounded by keeping too little cash to cover losses.
    Treasury’s insurance programs for Fannie Mae and Freddie Mac mortgages cover 20 percent of mortgages. Congress offered its Hope for Homeowners Program that was expected to help 400,000 through 2009, but attracted only several hundred applications in two months. 
    The Federal Deposit Insurance Corporation (FDIC) proposes to target the other 80 percent of the mortgages. Chair Sheila Bair told the Wall Street Journal in October, “Why there’s been such a political focus on making sure we’re not unduly helping borrowers, but then we’re providing all this massive assistance at the institutional level, I don’t understand it.”
    In November the FDIC requested bailout funds for its Loss Sharing Proposal to Promote Affordable Loan Modifications on problem loans, defined as more than 60-days overdue.  The FDIC program could modify 2.22 million problem loans by year-end 2009.
Loan servicers would be given incentives to modify those loans along two guidelines: (1) verifiable income and (2) payments for principal, fixed interest, taxes and insurance between 31 – 38 percent of monthly income. Payments could be modified by cutting interest rates, extending the term of the loan and using balloon payments. 
    To get the incentives, servicers must do a net present value (npv) analysis of loans in their portfolios and modify loans that would be more profitable than foreclosing. The FDIC would cover modification costs of $1,000 and absorb up to 50% of the losses if the borrower re-defaults.   
    The FDIC estimates it would avoid 1.5 million foreclosures at a cost of $24.4 Billion, assuming one-third re-default. 
    One problem is principal balances are NOT reduced even if less than housing values. One 20-year mortgage veteran, Mark Hanson, commented to the New York Post regarding FDIC’s similar plan for mortgages at IndyMac,  “I hate to say it but the homeowner is better off walking away.” 
    I asked David Bar from the FDIC information office why not forgive debt? He said, “We have no objection to debt forgiveness, but it is not a practical step under many of the securitization documents that cover most of the troubled loans.” 
    And in practice most people have continued such payments in order to own their home debt free.
    One international law firm, Arnold Porter, questions whether servicers and lenders would participate since they would be partially exposed to loan losses.  However the American Banking Association has recently endorsed the plan. 
    The program should be supported because it directly addresses the remaining problem loans fueling this crisis, which, incredibly, are not addressed by any other bailout program.  The FDIC is on target. Give them funds to modify loans. 
    And someone tell servicers and holders of problem loans to get organized because their principals are burning up and relief from bailout plans is not reaching those assets.