FDIC Chairman Brings New Loan Modification Incentive Plan

Loan modifications are certainly looking like the necessity plan with 7.3 million homeowners forecast to default between 2008 and 2010, with 4.3 million expected to end in foreclosure according to the latest numbers from Economy.com. Which is precisely the message FDIC Chairman Sheila Bair brought to Congress yesterday.

FDIC Loan Modification Plan

Speaking to a Senate panel on the mortgage and banking crisis, Chairman Bair recommended an enhanced loan modification plan. Under this proposal mortgage federal loan guarantees and credit enhancements would be offered to encourage mortgage servicers modify loans.

Mortgage servicers, companies that collect payments and work directly with homeowners, do so on the behalf of investors who create mortgage backed securities (MBS) from pools of these individual mortgages. Unfortunately, these entities often work with competing interests that impede work-outs from occurring efficiently. Chairman Bair's proposal would attempt to provide risk reducing incentives to restructure these relationship, increasing the probability of loan modifications over foreclosures.

Chairman Bair, using IndyMac Federal Bank as an example, demonstrated how loan modifications can effectively prevent foreclosures and still maximize potential investor yields. IndyMac currently has more than 60,000 mortgages greater than 60 days delinquent in payment. However, nearly 40,00 of those are potentially eligible for loan modifications.

Initially focused on IndyMac Bank's own servicing portfolio and mortgages held under securitization agreements, the FDIC is now moving to apply the program to delinquent loans held by Fannie Mae and Freddie Mac.

Chairman Bair emphasized that, " securitization agreements typically provide servicers with sufficient flexibility to apply the IndyMac Federal loan modification approach."

Treasury Plan Update

Interim Secretary Kashkari report to the Senate committee was more a less a restatement of his 10 day update given nearly a week ago. Senate Banking Chairman Christopher Dodd pushed a "sense of urgency" to Kashkari.

Several Committee members seemed to gravitate back to the FDIC discussion of loan modification as the homeowner assistance they have been clamoring for. However, Kashkari seemed more cautious on the approach extending hedged statements like, the Treasury is "very seriously considering" the program; while Bair hinted at more tentative bureaucratic resistance, stating we are engaged in "very good discussions" with Treasury.

Congress Wants Foreclosure Prevention

Members of Congress expressed urgency and frustration in their lines or questioning with little revelation of why it seems Treasury is having delay in deploying rescue aid. Senator Dodd seemed to indicate that Treasury is having trouble trying to integrate FDIC foreclosure prevention measures with programs to buy and guarantee impaired mortgage assets.