FDIC’s Bair Intensifies Federal Effort to Abate Foreclosure Problem

Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair has proposed a program directed towards delinquent homeowners to help them avoid foreclosure.

This program is part of the FDIC’s effort to save nearly 1.5 millions properties from foreclosure which the agency estimates would cost about $24.4 billion. It would cover delinquent mortgage loans that are not guaranteed or held by government-sponsored enterprises Freddie Mac and Fannie Mae.

The FDIC believes that it is a must to offer incentives to encourage loan modifications to prevent the increase in the number of foreclosures and the decline in housing prices. It also believes that an aggressive effort is needed to prevent the increase in foreclosures which the agency claims, is a major contributor in the financial crisis.

The agency has implemented a loan modification program using a systematic process at the IndyMac Federal Bank. The program aims to reduce mortgage payments by as much as 31 percent of the borrower’s monthly income. Modifications on loans are based on extension of term, principal forbearance and interest rate reductions. FDIC will guarantee loans that have been modified to provide the needed incentive for loan modification on sufficient scale.

Also, FDIC will leverage available federal funds to benefit more mortgages than specific incentives or outright purchases. The proposal also includes paying loan service providers $1,000 for each loan they have modified that meets the required standards. The agency will also shoulder up to 50 percent of losses if the borrower defaults again.

The agency envisions a program that can cover about 1.4 million delinquent non-government sponsored enterprise mortgage loans as of June of this year and additional 3 million mortgage loans expected to default by the end of 2009.

Of the estimated 4.4 million delinquent or about to become delinquent mortgage loans, the FDIC expects that about half of these or 2.2 million can be modified under its foreclosure relief plan.

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• Program to Avert Foreclosures: How It Works
• Habitat for Humanity Set to Help Rehabilitation Program for Foreclosures