Proving that Federal Deposit Insurance Corp.
really has been at odds with Treasury over how to best perform loan modifications, the FDIC announced Friday its own proposed plan to encourage a "systematic and sustainable process" of loan modifications by offering incentives to servicers.
The FDIC's proposed plan is based on the program put into place at IndyMac Federal Bank
to reduce first lien mortgage payments to as low as 31 percent of borrowers' gross monthly income, according to a press statement,
and comes in stark contrast to the "streamlined modification program" rolled out earlier in the week.
The incentives included in the proposal -- a $1,000 reimbursement paid to servicers for modification-related expenses and a 50 percent share in any redefault losses incurred after modification -- are designed to generate confidence in the plan and promote a wider-scale adoption of the loan mod process than that employed within IndyMac, the FDIC said.
"A loss share guarantee on redefaults 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 FDIC statement read, in part.
The proposed FDIC program would apply to an estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, and an estimated 3 million non-GSE loans that are projected to become delinquent by year-end 2009. The FDIC estimated that roughly one-half of the 4.4 million qualifying problem loans would be eligible to receive a modification under the plan -- but the agency also estimated that only one in three borrowers will redefault on an average loan size of $200,000.
The plan proposed by the FDIC would come with what, by now, are standard limitations: mods would be available to owner-occupants, for one thing. Government sharing of redefault losses would be limited only to modified loans on which the borrowers have made at least six payments; the loss sharing would be steadily reduced to 20 percent as a loan-to-value of more than 100 percent rises. Redefault loss sharing would be eliminated after a first-lien LTV exceeds 150 percent.
The proposal came just days after the Federal Housing Finance Agency
on Tuesday announced Fannie Mae (FNM)
and Freddie Mac (FRE)
would team with the HOPE NOW
alliance to roll out a streamlined mass loan modification plan
. Treasury Department
secretary Henry Paulson announced Wednesday the Treasury would ditch its plans to use funds from the Troubled Asset Relief Program
to buy troubled mortgage-related assets, for now cutting off TARP funding for loan modifications.
Diana Golobay at email@example.com