FDIC's Blair Touts Writedowns on Underwater Mortgages

By:
Kara Johnson | March 05, 2010

The FDIC is looking at principal writedowns in its loss-share agreements with failed banks as a way to help at-risk homeowners avoid foreclosure, according to FDIC Chair Sheila Blair.

Noting that underwater homeowners are now the main problem driving the mortgage crisis, Blair said the odds of foreclosure can be greatly reduced if the loan-to-value ratio can be brought down to around 100 percent. Although not a blanket solution, she said reducing the principal owed on some loans could offer homeowners a greater incentive to stay current on their loans and help mortgage holders cut their losses by avoiding foreclosures.
 
She acknowledged that the Treasury Department’s Home Affordable Modification Program (HAMP) has lagged behind its original projections for loan modifications, but said it’s still too soon to judge the program’s effectiveness.
 
Calling HAMP “the most ambitious mortgage modification effort ever undertaken,” she noted that the rate of new foreclosures slowed in the second half of 2009, suggesting that mortgage servicers were considering alternatives that could help keep people in their homes.
 
Addressing a real estate and policy conference in Washington on Thursday, Blair noted several hopeful developments in the housing market, while acknowledging looming problems that could undercut a recovery. She noted the Case-Shiller index of U.S. home prices posted seven consecutive monthly increases through the end of 2009, while the National Association of Realtor’s rating of home affordability is at a record high.
 
However, she pointed to a major problem that lies ahead as large numbers of nontraditional mortgages – such as the interest-only and negative amortization loans that were popular at the peak of the housing market – are recast to fully amortizing loans. Many of these homeowners will be unable to refinance their mortgages before they recast due to being underwater on their loans and may find the increased monthly payments more than they can bear.
 
Though not as numerous as the subprime loans that set off the housing crises, she said such loans tend to be concentrated in the high-cost coastal markets that experienced where home prices soared, then fell sharply. She said new policies are needed to address such challenges, listing principal reduction as one option being explored.

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