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November 14th, 2008

(Update1) FDIC Announces Non-GSE Loan-Mod Program

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Beginning at the end of last month, reports began to surface about the Federal Deposit Insurance Corporation’s plan to modify approximately two million delinquent mortgages. In the meantime, while other government and private foreclosure initiatives were announced, the FDIC’s plan had seemingly been delayed behind the White House’s opposition to the plan.

Today the FDIC released the details of the plan on their website. How will the effectiveness of this plan differ from the other recently announced initiatives? According to the FDIC there’s a problem: loan modification is a slow process — one that yields too few results. Their solution to speed the process is to guarantee to cover up to 50% of the loss sustained from “redefaults of modified mortgages.” The FDIC’s plan offers lenders an incentive of $1,000 for every modified loan, as opposed to the FHFA’s proposed $800, and will restructure the loan down to 31% of the borrower’s “mortgage debt-to-income ratio,” as opposed to the FHFA’s “industry standard” of 38%. Yet, these modifications are going to be made for non-GSE loans only, meaning jumbos and other non-conforming loans.

“Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. 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,” said the FDIC on its website.

The FDIC’s program has been set up to address another class of borrowers not covered by previously announced mod programs — such as the FHA Secure, FHFA, CITI, JP Morgan Chase, Bank of America, Etc., points out HSH Vice President Keith Gumbinger.

The plan, which the FDIC estimates could modify 2.2 million non-GSE loans, would cost the government $24.4 billion which could come from the $700 billion financial-rescue plan. To read more specifics on the plan click here.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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