FDIC Weighs Loan Principal Cuts to Fight Foreclosure

Sheila Bair has finally let the trial balloon out of the bag. Just watch what Wall Street does to position Bair as some kind of kook. In truth, she ought to be running the financial part of this recovery although the FDIC is supposed to insure deposits, not necessarily write offs of bad loans. Bottomline, there will be no recovery without principal reduction. This will never be over without a sharing of the losses created by Wall Street. If you are looking for a non-litigation method, and I am not sure there is one,  to reach out and touch everyone in distress look no further than my first entries back in October 2007 under the heading “Amnesty for Everyone” or read Brad Keiser’s post right here from June 2008 entitled “Mortgage Meltdown: Fingers of Blame” where he predicted that homeowners would be the last group to be granted any “amnesty.”

It’s not about ideology. It’s about practicality. In a mess this big you fix it and stop arguing about it. Leave the argument till later. Divide the losses amongst ALL the players based upon their ability to withstand it and yes, that DOES include the taxpayer now that we have so totally screwed up this recovery. Nothing real has occured. No regulation, no turning over the upside down ship of finance, no sharing of the losses —- that has simply been turned onto the taxpayer past,present and future. Municipalities, cities, counties, state budgets and yes many non-profits and charitable foundations and organizations whose budgets or investment base have been wrecked even if they were not invested with Bernie Madoff. Folks we are in this together.

EVERYONE is effected by the housing crisis in one form or another. Let the justice system take care of the criminal enterprises through law enforcement. We are finding inertia through finding blame of borrowers, blame of title companies, mortgage brokers, appraisers, rating agencies, investment banks …  et al.

Everyone knows it but only a few people are willing to say it: principal reduction. Hundreds of thousands who are not in foreclosure are $100k-$300k underwater, are they supposed to continue to pay on their mortgage for 10 years and hope they break even? Questionable business decision when you look at it mathematically. They have been damaged and no one has a program for them…wait until this part of the populace starts making noise. The financial sector shoulders SOME of the losses not just arguably because they should but because they can. It means that borrowers shoulder SOME of the losses not because they should but because they must. It means that where borrowers cannot withstand the burden even after principal reduction, the GOVERNMENT steps in with Taxpayer money and shoulders SOME of the losses not because it should but because it must. Property values in entire cities and regions are at stake, which gets to tax base, which impacts school systems…which impacts our children and grandchildren.

ALL the players who were intermediaries in the securitization chain from originating lenders, to underwriters that sold the MBS to state retirement systems, insurers who issued default insurance, ratings agencies…they all made a KILLING with little or no capital at risk, they should but because they were part of the problem, they got paid to play and now that the game didn’t turn out so well they get to share SOME of the losses.

By Alison Vekshin

Dec. 3 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair may ask lenders to cut the principal on as much as $45 billion in mortgages acquired from seized banks, expanding her bid to aid homeowners as unemployment rises.

The FDIC, which has taken over 124 failed banks this year, may seek to have lenders that sign loss-sharing agreements when acquiring the assets do more than cut interest rates or defer the loan’s principal, Bair said today in an interview at Bloomberg’s Washington office.

“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

Bair, 55, is stepping up her effort to prevent U.S. home foreclosures, using the agency’s relationship with lenders to make change. She has pressed mortgage-servicing companies to modify loan terms for struggling borrowers and unsuccessfully lobbied last year to have the Treasury Department use the Troubled Asset Relief Program to curb foreclosures.

The FDIC set up a foreclosure-relief program last year at IndyMac Federal Bank, a failed California mortgage lender, to be a model for the banking industry. The program, using a combination of interest-rate reductions, term or amortization extensions and principal forbearance, led to agreements to modify about a third of IndyMac’s eligible loans.

Rising Unemployment

In September, Bair urged banks that are sharing losses with her agency to temporarily reduce mortgage payments for out-of- work borrowers. U.S. unemployment soared to a 26-year high of 10.2 percent in November.

The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.

“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal writedowns.”

Under the average loss-sharing agreement, the FDIC pays as much as 80 percent of losses on a residential mortgage up to a set threshold, with the acquiring bank absorbing 20 percent. Any losses exceeding the threshold are reimbursed at 95 percent of the losses booked by the acquirer.

$80 Billion

The FDIC has loss-sharing agreements on $109.1 billion of failed-bank assets, including $44.7 billion for single-family home loans, spokesman Andrew Gray said.

“For the acquiring banks, it’s great because now they get more protection for the assets that they’re picking up and they have more flexibility in dealing with the problems,” John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York and is a former FDIC attorney, said in a telephone interview.

Principal reductions will help borrowers who are “underwater” on their payment-option adjustable-rate mortgages, whose principal expands over time, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.

“In order to make those loans affordable and give those homeowners a reason to stay rather than walk away, principal reduction is going to be key,” Gordon said.

The U.S. Treasury Department plans to pressure lenders to complete modifying home loans to troubled borrowers under a $75 billion program. Almost 651,000 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of October, up from 487,080 as of September, according to the Treasury.

The Washington-based FDIC insures deposits at 8,099 institutions with $13.2 trillion in assets. The agency is charged with dismantling failed banks and manages an insurance fund it uses to reimburse customers for deposits of as much as $250,000 when a lender collapses.

13 Responses

  1. Charlie A is right, let the banks fail, that was the whole purpose on using a mortgage, it was a gamble to the death because you owed the bank for life, you never owned the property unless the banker died first. But you would pay till death took somebody.
    Roosevelt changed that.
    You’re right about the BS and hidden clauses in new contracts, I’d watch out for any and all “funny” wording.
    Got a new trick now being played on homeowners: A so-called, Class Action lawsuit that the Banks have set up. They contact you, tell you that you don’t have to do a thing, that they have signed you up already with a claim.
    The truth is that this “class action” is really to release them from ANY RACIAL DISCRIMINATION or PREDATORY LOAN LIABILITIES.
    Your payment is around $200 and if you accept the money you relinquish any claims to being discriminated against!
    It’s all written up in legalese to throw you off guard and confuse you.
    But the whole thing looks legit, looks like you have sued the bank, looks like you won and all you get for your “trouble” is chump change of 200.
    The reason the “winnings” are so low, is the high number of people who are in the “lawsuit”.
    It makes it look as though it isn’t worth fighting over and makes you think that something good has been accomplished.
    You have to read over the contract they send you very carefully, or better yet take it to a real lawyer to translate.
    They sent one to my sister and now she’s depressed and believes there is not point in fighting them anymore. I don’t know if she accepted the deal or not.
    Dirty, rotten, bastards, have more tricks than the devil himself!

  2. Please do not bring Sharia Law into this, if anything Sharia law would have stopped this BS from ever happening. Do some research, ok?
    None of this would be happening if Sharia Law had been involved.
    Just a side note: things have gotten so bad, even getting a loan based on Sharia Law, has become impossible, the restrictions so tight that there is no point in asking for a loan.

  3. Take 5 minutes and watch this video. FDIC’s sweetheart deal to OneWest Bank.


  4. Sue – Here is a web site with contact info for Jacksonville Legal Aid.


    They will help you and, by the way, April Charney works there.

    She is widely considered one of the best attorneys in foreclosure defense.

  5. Does anyone know a great attorney in Jacksonville, Florida that they would recommend. Indymac has us in foreclosure and won’t help when we are willing to make payments


  6. Says it all, from today’s NY Times:

    “Mr. Belvedere said he would be willing to live with all that lost equity if he could refinance his loan from a variable rate, which could eventually go as high as 12 percent, into a 30-year fixed term.

    His lender said no, citing the diminished value of the property. “It makes no sense and is so frustrating,” Mr. Belvedere said. “I’m ready and willing to pay the mortgage for the next 30 years, but they act like they’d rather have me walk away.”

    article at http://www.nytimes.com/2009/12/13/business/economy/13rates.html?_r=1&hp=&adxnnl=1&adxnnlx=1260644699-Vtg0S3tYGNbQajrQVGphfA

  7. Trying to keep my home. WHY would the bank accept a short sale, but be against there policy to accept a principle reduciton when the loan is claimed to be owned by a XYZX Trust? we are in default, but have good income now to support….

  8. This is off topic and I am sorry, but have you heard of Bank of America keep my change and your change fee, extended credit change fee? it is $35.00 for . 99 cents, it is not an over draft fee, it is Bank of America keep my change and your change.

  9. Mike H,

    Great comment! Hope you don’t mind if I plagiarize your definition of “mortgage” because I’ve already done so in a local newspaper!

    Very succinct and on target.


  10. why would a bank what a reduction of the principal balance of a mortgage? when they could steal it freely with the permission of the court and the government? this is just another ploy by the government run agency such as FDIC, treasury department and federal reserve bank in order for this agencies to ask another bailout . the defaulted homeowners will be mislead again by this agency in order to get another round of bailout. we are always been the reason why they needed a bailout. it was announced by timothy g. that the bailout will be extended till october of next year the remaining money of 700billion TARP money, this is another ploy to get additional bailout money to bailout the bank not the homeowners. its a crap. i don’t trust them no more. this is all bull.

  11. It all sounds good and dandy! as it lately does everything that comes from the government’s mouth in regards to “helping” the most screwed party in this financial circus, YOU AND I !, a circus of which we all are players/clowns in,like it or not!, but what it really remains to be seen is whether they will actually “force” the banks(thieves) to reduce the principal or not, it all seems to be written on sand. funniest thing is that the “pretender lenders” that get the most help from the “pretender protectors” (government) are the ones the turn around and screw people the most, want an example? look at damn indymac! those guys are real bastards! they are perhaps the most sneaky idiots i have ever seen, how can someone have the heart to foreclose on someone the day before thanksgiving as many people i know had it happened to them?. I certainly hope that this “talk” turns into a “walk”. I believe that at this point we Americans are totally fed up with their crap, enough is enough! bring those bastard thieves down to their knees and make them own up the biggest heist ever perpetrated by our very own “people”, i am not sure they deserve to be called people, but for the sake of illustration i am doing so here, our country needs to embark on recovery, we need to start swimming towards shore, we have been drifting way to long in the sea of crap that these thieves put us in, let’s step up our fight a notch or two, let’s have our voices heard! let’s put the lazy and deceiving “pretender protectors” to actually start earning their money, not just simply stand there and watch how we all are financially raped by the Evil doers!!! let’s all unplug once and for all the “EVIL MACHINE”, let’s make sure that our children learn from us how stand up to the devil himself! To victory America!!!!!!

  12. I have an idea which won’t cost the taxpayers anything, just let the banks fail so that the borrowers win the “death gamble” and own their properties free and clear.
    We all seem to have forgotten that the very words
    “mort” and “gage” in French mean “death gamble”.
    If the borrower died first, the debt is due on death,
    which is ususally what happens. Once in a while,
    the lenders all die enmasse, and the borrowers win
    the “death gamble”. What’s fair for the one is fair for
    the other. Just let the laws of economics take their
    Bairs idea is just one more bailout for the lenders
    to prevent them from losing the “death gamble” that
    Keynes talked about. It is not to help the defrauded
    borrowers who were defrauded by fiat funny money
    issued by the banking system.


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