Forget Forbearance; FDIC Eyes Principal Forgiveness
[Update 1: adds previous principal forgiveness request by ACORN.] Institutions that acquire failed banks taken over by the Federal Deposit Insurance Corp. (FDIC) may soon be required to cut principal off mortgages instead of simply forbearing a portion until a later day or lowering interest rates, according to comments and FDIC official made to Bloomberg this week. The principal forgiveness might apply to as much as $45bn of mortgages from failed banks. Regulators so far in 2009 shut down 124 banks, costing the FDIC's insurance fund billions of dollars and putting billions more in assets up for acquisition. Institutions that participate in loss-sharing agreements with the FDIC on asset acquisitions may be forced to share a greater portion of losses related to the principal cuts. “We’re looking now at whether we should provide some further loss-sharing for principal write-downs,” FDIC chairman Sheila Bair told Bloomberg. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.” Bair added: “We’ll obviously lose by providing loss-share for principal write-downs.” The lower foreclosure rate achieved through principal forgiveness might actually help the FDIC gain back some of the funds it would have to spend on the loss-sharing agreement. Plans are not yet final, but the FDIC made a similar move in September when it urged loss-sharing institutions to temporarily forbear on a portion of mortgages, lowering payments for unemployed borrowers. Bair's comments follow a move by the Association of Community Organizations for Reform Now (ACORN) in August to urge servicers to explore foreclosure alternatives including principal forgiveness as opposed to forbearance. Write to Diana Golobay.