FDIC May Seek Principal Reductions on At-Risk Mortgages
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- Kara Johnson | December 08, 2009
The FDIC may seek to reduce the principal on more than $45 billion in mortgages held by failed banks that it acquired in an effort to help “underwater” homeowners.
The agency may seek markdowns as part of loss-sharing agreements it signs with lenders who acquire the assets of the failed banks, FDIC Chair Sheila Blair has said. The agency acquired 124 failed banks and their assets in the past year.
“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said, in an interview with Bloomberg News. “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.”
Though the agency would lose money by marking down the principal on at-risk loans, Blair said it is investigating whether it might actually recover those losses through reduced foreclosures.
Marking down the principal on mortgages where the property has significantly declined in value has been advocated as a foreclosure remedy by many economists and consumer advocates, but so far has not been part of any government response to the rising tide of foreclosures and mortgage delinquencies.
Under current loss-share agreements, lenders acquiring the assets of a failed bank from the FDIC cover 20 percent of the losses on acquired mortgages, with the FDIC picking up the other 80 percent. In return, the FDIC requires that lenders offer loan modifications to assist struggling homeowners, which typically have been in the form of lower interest rates or deferred payments.
The new approach would add principal reductions to that mix. Such reductions would be voluntary, but the FDIC would provide incentives to the acquiring lenders, according to an FDIC spokesperson.
The $45 billion in mortgages represent only about one half of one percent of all U.S. mortgages, but the move could have a significant effect by paving the way for further principal markdowns by other lenders or in other government programs. The government’s primary foreclosure prevention program, Making Home Affordable, seeks to assist homeowners by reducing interest rates on mortgage loans, but does not include a provision for reducing principal on homes that have lost value.
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