FDIC Lays Down Home Loan Modification Plan


FDIC lays out broad home loan modification plan

Fri Nov 14, 2008 2:47pm EST
 Related NewsBy Karey Wutkowski

WASHINGTON (Reuters) – The federal agency that insures most U.S. bank deposits unveiled a plan to prevent about 1.5 million home mortgage foreclosures by promising to share any losses with mortgage companies that agree to refinance certain home loans.

The agency, the Federal Deposit Insurance Corp, said on Friday the plan would cost the government about $24.4 billion, which could be paid from the U.S. Treasury’s $700 billion bailout program for the financial industry.

So far, most of the money in the bailout program, the Troubled Asset Relief Program, or TARP, has been injected as capital into banks.

FDIC Chairman Sheila Bair, who spent weeks unsuccessfully lobbying Bush administration officials for the foreclosure prevention plan, unveiled her agency’s proposal two days after Treasury Secretary Henry Paulson dismissed the idea of the government underwriting failing home loans.

Paulson told reporters on Wednesday, “That (foreclosure plan) is a subsidy, or spending, program. The TARP was investment, not spending.”

The FDIC pushed forward with its plan, posting it on its website Friday morning (http://www.fdic.gov/consumers/loans/loanmod/index.html).

“Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow,” the FDIC said. “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”

The FDIC said its plan would modify about 2.2 million mortgage loans by offering financial incentives to mortgage servicers. It would pay servicers $1,000 to cover expenses for each loan modified to the required standards, and would promise to share up to 50 percent of losses incurred if a modified loan defaults.

Eligible borrowers would include those who have missed at least two monthly payments on loans for homes they live in. Servicers would be expected to lower those borrowers’ monthly payments to about 31 percent of the borrowers’ monthly income.

The Treasury Department said on Friday that it was aggressively looking at ways to reduce skyrocketing home foreclosures under the TARP.

“We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications, which are a key part of working through the necessary housing correction and maintaining the strength of our communities,” Treasury Interim Assistant Secretary Neel Kashkari said in testimony prepared for delivery to a U.S. House of Representatives committee.

(Reporting by Karey Wutkowski; editing by John Wallace) 

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2 Comments

  1. Loan modification mortgage is a process whereby a home owner’s mortgage is modified and both the lender and homeowner are bound by the new terms of the new mortgage. The most common loan modifications are listed below:

    lowering the mortgage interest rate
    reducing the mortgage principal balance
    fixing adjustable interest rates within the mortgage
    increasing the loan term throughout the mortgage
    forgiveness of payment defaults and fees
    or any combination of the above

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