FDIC Proposes $50 Billion Mortgage Pay Down Program; Questions Abound
The Federal Deposit Insurance Corp. on Wednesday proposed the latest in a string of recent attempts by lawmakers and policyheads to stem growing mortgage losses, suggesting that the Treasury fund $50 billion to help borrowers pay down a portion of principal on outstanding mortgages deemed "unaffordable" by the government. "Government efforts should focus on helping the market reach equilibrium without overshooting," wrote Sheila Bair in an op-ed published Wedensday in the Financial Times. "This can be done only through widespread restructuring of unaffordable mortgages into affordable ones." The program would see certain borrowers' mortgages restructured by paying down up to 20 percent of principal via a so-called "Home Ownership Preservation loan" backed by the Treasury; borrowers would then refinance into a fixed-rate traditional mortgage, and pay only on that 80 percent of modified principal for the first five years after restructuring. Investors, in turn, would agree to take a 20 percent haircut on their existing position -- sort of. Under the FDIC proposal, investors would receive funds from the Treasury's HOP loan and agree to pay interest at the Treasury's rate for the first five years of the loan (making the loan free to consumers). After five years, borrower would then pay on the full 100 percent owed, with the 20 percent HOP loan amortized at below-market, Treasury-specific rates. If the borrower defaults, sells or refinances, the HOP debt is in the super-senior position, putting the Treasury in the pole position for any recovery. "The housing crisis is a national problem," Bair said. "Painful as it is, we must be prepared to apply government efforts now." The program would only be available to borrowers whose loans are defined as "unaffordable" -- that is, borrowers whose debt-to-income was above 40 percent at the fully-indexed rate when the loan was originated, borrowers whose mortgage fits within current FHA lending limits, and who took out their loan between 2003 and mid-2007. The FDIC said in press materials that it expects that one million borrowers would qualify for the program. Industry response tepid There appear to be a number of concerns about the FDIC's proposal, according to senior executives that spoke with HW on strict condition of anonymity -- not to mention some apparent confusion as to implementation and contingencies. "We're talking about underwater borrowers, which means most of these people either have a second lien or they've got MI [mortgage insurance]," said one source, an exec at a large servicing operation. "Why would a second lien holder voluntarily agree to be completely and immediately wiped out in a transaction, when they could get more by collecting even one more payment from a borrower that will ultimately default?" "And what does this mean for a mortgage insurer? That the Federal government is taking up their loss position?" A review of the proposal materials provided by the FDIC did not answer that question directly, saying only that under the proposal, "the underlying loan is modified within the mortgage pool and does not worsen the position of subordinate lien holders." Which, we suppose, is another way of saying that you can't do worse than zero. As our sources have suggested, however, it's when you reach zero that matters, too. An attorney that spoke with HW raised different concerns, suggesting that the program could expose the Federal government to various levies and fees that various local municipalities are now charging lien-holders on mortgages. Most sources had a tough time believing that the program would be costless to the government, a stance the FDIC reiterated numerous times in materials detailing the HOP plan. "What happens if an investor goes belly up in year two of five? What happens if payments are missapplied?" another source said. "Is the Treasury going to repossess its secured interest because whomever refinanced the loan went out of business or filed bankruptcy? Or are they going to eat the losses? Or are they going to recap that lost interest onto what the borrower owes?" It's certainly not out the realm to consider such scenarios, given the number of lenders/noteholders/investors that have run aground in the past 12 months alone. An ABS analyst that spoke with HW focused on the distribution of proceeds from the HOP loan, saying that it's unclear which investors would support such a deal and which would not -- support would likely depend on the relative status of a given transaction, we were told, and where current and expected losses stacked up against structural keys, like overcollateralization triggers. "All investors and all deals are not created equal," said the analyst.