Tuesday, November 18, 2008

FDIC’s Bair Pushes Loan Modification Program

(Housing Wire) The U.S. can prevent 1.5 million foreclosures at a taxpayer cost of $24 billion, Federal Deposit Insurance Corp. chairman Sheila Bair said Tuesday in remarks before Congressional leaders, as she continued to push the FDIC’s recent proposal for mass loan modifications for troubled borrowers. At a hearing of the House Financial Services Committee called to discuss oversight and implementation of the Emergency Economic Stabilization Act of 2008, Bair was clearly more focused than either of her counterparts at the Treasury or Federal Reserve on the need to manage down a growing number of foreclosures in the ailing U.S. housing market.

Bair said that “the failure to deal effectively with unaffordable loans and unnecessary foreclosures” was “the root cause of the current economic crisis,” taking clear issue with U.S. Treasury secretary Henry Paulson’s defense during the same hearing of the direction taken thus far with the $700 billion Troubled Assets Relief Program.

The FDIC late last week unveiled an updated loan modification program it has been lobbying Treasury and Bush administration officials to implement, despite the recent rollout of a systematic loan modification program at both Fannie Mae (FNM: 0.5007 +11.27%) and Freddie Mac (FRE: 0.645 +21.70%). The program rolled out by administration officials “falls short of what is needed to achieve widescale modifications of distressed mortgages,” Bair said last week. She wants to see a prgoram put into place that would see the government assume redefault risk on certain modified mortgages.

Tuesday morning, she detailed the mechanics of the sort of workout plan she said had been used successfully at IndyMac Federal Bank in the past few months — although it’s wholly unclear if the program’s results represent success or failure. The IndyMac modification plan was unveiled by the agency in August, targeting 40,000 of the 60,000 or so severely delinquent loans at the bank; Bair said in her testimony Tuesday that thus far, more than 5,000 borrowers’ loans have been modified under the program.

It’s not clear, however, if that implied modification rate — 12.5 percent of eligible severe delinquencies, and 8.7 percent of total delinquencies — is significantly better or worse than what the former Alt-A lender was seeing before its servicing platform was assumed by the FDIC. Under the program, eligible borrowers are offered “affordable and sustainable payments” using interest rate reductions, extended amortization and deferrment of principal.

Some policy experts that have spoken with HousingWire privately have suggested that if the FDIC’s modification approach at IndyMac is truly and honestly successful, and widely implemented, it will clearly incent performing borrowers to default in an effort to secure below-market interest rates on their own mortgage debt. “Bair and the FDIC are walking a fine line here,” said one economist, who asked not to be named because his view were his own and not those of his employer. “Her program needs to succeed, but not so much so that everyone decides they too ought to get a 3 percent mortgage.”

Such misgivings are likely behind the current Bush administrations hesitance to the new FDIC proposal, the source said. Nonetheless, Bair has been at the forefront of fighting for troubled homeowners, something that has won her praise from various sectors, including key Democrats. Whether she will continue her role at the FDIC under an Obama administration is yet unknown.
“Today, the stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols,” Bair argued in her testimony. “The damage to borrowers, our communities, our public finances, and our financial institutions is already too severe. An effective remedy requires targeted, prudent incentives to servicers that will achieve sustainable modifications by controlling the key risk from the prior, less sustainable modifications — the losses on redefault.”

Bair’s proposal assumed a redefault, or recidivism rate, of 33 percent in coming up with her $24 billion cost figure. It’s at least worth considering that estimate is likely a little too sunny — redefault rates have averaged roughly 40 percent on modified loans, during even the best housing markets. And it’s unclear yet how many of the 5,000 modified loans at IndyMac under its new program will fall victim to recidivism, our sources suggested.

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