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FDIC Backs More Aggressive Loan Modification Plan

Agency breaks with Bush administration over helping homeowners

By Mark Huffman
ConsumerAffairs.com

November 14, 2008

FDIC Chief Sheila Bair

The Federal Deposit Insurance Corporation (FDIC) has "gone rogue," publicly breaking with the Bush Administration on the best way to end the housing crisis.

FDIC Chairman Sheila Bair has issued a proposal for the government to partially guarantee troubled mortgages if lenders agree to rewrite then on more favorable terms. Bair said her plan could prevent about 1.5 million foreclosures.

She wants to use about $24.5 billion from the governments $700 billion Trouble Asset Relief Program, but the idea was rejected by Treasury Secretary Henry Paulson.

Instead, the administration this week backed a plan by Fannie Mae and Freddie Mac, along with other major mortgage lenders, to aggressively provide "workout" programs for homeowners in danger of default. Bair contends it's not aggressive enough to do the job.

"Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow," the FDIC said in unveiling the plan. "It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures."

The agency contends that loan modifications should be provided using a systematic and sustainable process. The FDIC initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31 percent of monthly income.

Modifications are based on interest rate reductions, extension of the length of the loan, and even in some cases reductions in the principle. FDIC wants to try that approach on a national scale.

"A loss share guarantee on re-defaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification," the agency said.

The FDIC said it would be prepared to serve as contractor for Treasury and points to what it calls its extensive experience in the IndyMac modification process.

Basic structure and scope of proposal

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According to the FDIC, the proposal is designed to promote wider adoption of such a systematic loan modification program:

1.By paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and

2.Sharing up to 50% of losses incurred if a modified loan should subsequently re-default.

"We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009," FDIC said. "Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan."

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