FDIC Foreclosure Solution

I have been saying for months, to those that would listen, that we need to find a way to help owner occupant home owners stay in there home through loan modifications and forbearance arrangements. The FDIC must have been reading my mind. Recently, and with little press coverage, the FDIC has proposed a solution to the foreclosure crisis that I think will work. A couple of months ago, the FDIC took over Indy Mac Bank. Since then, they have implemented a plan with Indy Mac that they feel would work nation wide.

Through the Indy Mac experience, the FDIC found that only 4% of delinquent loans are getting help through Loan Modifications. Their solution, to reduce the 1st lien mortgage payments to as low as 31% of the households monthly income through rate reductions, extension of terms and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages. The FDIC would be prepared to serve as contractor for the Treasury Dept. and already has extensive experience in the Indy Mac modification process. In other words, the government would back part of the loans so that the banks do not suffer all of the loss in case of a redefault and would be willing to implement and run point on this so that the rest of the government does not screw it up.

The FDIC reports that there are 1.4 million loans that are currently 60 days past due and an additional 3 million loans are projected to become delinquent by the end of 2009. That's 4.4 million loans that will have gone delinquent. Of this 4.4 million loans, the FDIC projects that 2.2 million (1/2 of the loans) can be modified. This would result in helping out $444 Billion worth of loans. Assuming a redefault rate of 33%, the FDIC would prevent 1.5 Million foreclosures by the end of 2009! And, the FDIC estimates that this program will cost a total of $24.4 Billion. A far cry from these $700 billion bailouts we keep seeing.


To view the actual FDIC proposal, click here: http://www.fdic.gov/consumers/loans/loanmod/index.html