FDIC Wants More Aggressive Federal Steps to Plug Foreclosures

November 19th, 2008 | Tags: Foreclosures

The chairperson of Federal Deposit Insurance Corporation, Sheila Bair has always been strongly putting pressure on the feds to take more aggressive steps to plug the flood of foreclosures. It is the main cause – the gangrene that is spreading the rot across the entire financial system. But others in the Bush administration like Henry Paulson have not entertained her views. Paulson and the like believe that the thrust should be on the jumbo financial bodies in Wall Street.

Bair and the FDIC continue to hold on to their opinions. Recently the FDIC has come forward with a proposal that expects to save 1.5 million borrowers from the jaws of foreclosure. The plan would cost approximately $24.4 billion. The programme would target those mortgages that did not have the backing of Fannie Mae, Freddi Mac, GSEs or government sponsored bodies.

FDIC explained that despite foreclosures being painful and costly for all concerned – lenders, borrowers and the community, the pace of modification of loans has been extremely tardy. It was about 4% of the grave delinquent loans per month. Hence the urgency to provide the right incentives that would rapidly be effective so as to stem the tide of foreclosures to stabilize the real estate market is imperative.

The modifications must be systematic and in a manner that is sustainable. FDIC has initiated such a policy with the soured mortgages of IndyMac. As a result first lien mortgages have been reduced to 31% of the monthly income. Modifications may involve reduction of interest rate, extension of life of the loan and forbearance of principal. A guarantee on sharing of the loss on recurring defaults of these newly modified loans could act as an incentive that will allow for alterations of mortgages to realistic levels on a large scale. Using the government funds for this purpose rather than outright purchase will be beneficial in the long term and for more number of loans at risk from foreclosures. FDIC could play the role of a contractor for the Treasury taking into account its experience and success in dealing with IndyMac. The proposal is for a wider application of what has been applied to the problem of IndyMac.

The proposal is to pay servicers $1,000 to cover related expenses for each loan modification as per the standards laid out and sharing of about 50% of losses suffered if a modified loan should later one run into default.