Best Foreclosure Prevention: FDIC Loan Modification
- By:
- Tom Kerr | September 25, 2008
Sheila Blair, head of the Federal Deposit Insurance Corporation (FDIC), is a passionate advocate of mortgage loan modification to avoid foreclosure. Now she'll have a chance to put her ideas to the test with the FDIC takeover of a failed bank that specialized in bad mortgages.
Although the entire banking industry is struggling, one member of that group-IndyMac-has been in the spotlight recently because it collapsed and caused a Great Depression style "run" by depositors. The dramatic incident left customers worried if they would ever get their money back, and prompted an emergency takeover by the nation's banking industry insurance giant, the FDIC.
Most of the trouble at IndyMac can be traced directly to risky loans that wound up as foreclosure statistics, so the failure of the institution presented a golden opportunity for Sheila Blair to put her theories into practice. All year, Blair has been calling on lenders to do extreme loan modification as a foreclosure prevention strategy, but without mandatory regulatory teeth behind her requests, those suggestions have been largely ignored.
Now, thanks to the takeover, Blair is in charge of her own lending company. Since she can call the shots, she's embarking on a major experiment in loan modification. Most of the FDIC loan modifications will be extended to those who have good credit but are caught up in potential foreclosure problems due to high-risk loans with unwieldy monthly payments. To prevent foreclosure, several thousand of these are already in the works, as the FDIC tries to salvage what's left of some $21 billion IndyMac loans.
Some of the provisions and concessions extended to borrowers are highly unusual for the mortgage industry. Borrowers looking to qualify for the loan modification program have to verify their income and provide proof that their mortgage is for their primary residence. If so, they may qualify for FDIC loan modifications, including interest rates as low as 3 percent for five years, payments amortized over 40 years, and interest charged only on part of the outstanding loan balance. In some cases, unpaid late fees will be waived.
One problem that critics see-and most of the critics have a big stake in the mortgage business as lenders or investors-is that the FDIC loan modifications at IndyMac don't appear to address the problem of second mortgages. Those holding liens in that subordinate position could see their claims wiped out by restructuring of the mortgages through loan modification. The same holds true for investors who bought loans packaged and sold off as "securitized" products on Wall Street.
Compared to what mortgage companies have done, the FDIC loan modification proposals are revolutionary and controversial. But radical action is what Blair and others like her say that we need to stop the foreclosure crisis. Time will soon tell if the experiment works. If it does, perhaps others will adopt similar foreclosure prevention solutions.
Although the entire banking industry is struggling, one member of that group-IndyMac-has been in the spotlight recently because it collapsed and caused a Great Depression style "run" by depositors. The dramatic incident left customers worried if they would ever get their money back, and prompted an emergency takeover by the nation's banking industry insurance giant, the FDIC.
Blair foreclosure project
Most of the trouble at IndyMac can be traced directly to risky loans that wound up as foreclosure statistics, so the failure of the institution presented a golden opportunity for Sheila Blair to put her theories into practice. All year, Blair has been calling on lenders to do extreme loan modification as a foreclosure prevention strategy, but without mandatory regulatory teeth behind her requests, those suggestions have been largely ignored.
Now, thanks to the takeover, Blair is in charge of her own lending company. Since she can call the shots, she's embarking on a major experiment in loan modification. Most of the FDIC loan modifications will be extended to those who have good credit but are caught up in potential foreclosure problems due to high-risk loans with unwieldy monthly payments. To prevent foreclosure, several thousand of these are already in the works, as the FDIC tries to salvage what's left of some $21 billion IndyMac loans.
Maverick modifications
Some of the provisions and concessions extended to borrowers are highly unusual for the mortgage industry. Borrowers looking to qualify for the loan modification program have to verify their income and provide proof that their mortgage is for their primary residence. If so, they may qualify for FDIC loan modifications, including interest rates as low as 3 percent for five years, payments amortized over 40 years, and interest charged only on part of the outstanding loan balance. In some cases, unpaid late fees will be waived.
One problem that critics see-and most of the critics have a big stake in the mortgage business as lenders or investors-is that the FDIC loan modifications at IndyMac don't appear to address the problem of second mortgages. Those holding liens in that subordinate position could see their claims wiped out by restructuring of the mortgages through loan modification. The same holds true for investors who bought loans packaged and sold off as "securitized" products on Wall Street.
Compared to what mortgage companies have done, the FDIC loan modification proposals are revolutionary and controversial. But radical action is what Blair and others like her say that we need to stop the foreclosure crisis. Time will soon tell if the experiment works. If it does, perhaps others will adopt similar foreclosure prevention solutions.
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