|The Federal Deposit Insurance Corporation has proposed paying servicers $1,000 to modify delinquent loans and sharing in losses of modified loans that re-default. Around 1.5 million foreclosures would be prevented under the proposal.
The plan, unveiled today, called the pace of loan modifications "extremely slow." Modifications are completed on just 4 percent of delinquent mortgages each month.
The federal insurer said modifications should be provided using a systematic and sustainable process -- like it has initiated at failed IndyMac Federal Bank FSB. That experience makes the FDIC an ideal candidate to serve as contractor for the Treasury, which would fund the program's $24.4 billion cost using available government funds -- namely, the $700 billion Troubled Asset Relief Program.
The plan calls for a $1,000 payment to servicers for each modification to cover expenses.
In addition, the FDIC would share in half of any losses on loans that default no sooner than seven months after modification. The term of the loss-share would be eight years. On loans where the loan-to-value exceeds 100 percent, the government's loss-share would decrease as the LTV rises -- with no loss-share available above 150 percent LTV.
Qualified borrowers would be at least 60 days delinquent and need to occupy the property securing the loan being modified. The mortgage debt-to-income ratio would need to be limited to 31 percent. The monthly mortgage payment would have to be lowered at least 10 percent to qualify a servicer for the $1,000 payment.
FDIC said loans from government sponsored enterprises Fannie Mae and Freddie Mac account for around 13 percent of 1.6 million U.S. mortgages that are currently at least 60 days past due. Another 3.8 million loans are expected to become delinquent by the end of next year.
Non-GSE problem loans are expected end next year at 4.4 million for around $888 billion, and the FDIC estimates 2.2 million of them for $444 billion can be modified under its plan.
A net present value test would be used to compare the projected value of a foreclosed loan with the projected value of a modified loan. The test would be systematically applied by participating servicers to all prospective borrowers to determine if they are suitable candidates under the program. Failure to perform a systematic test would disqualify a servicers from the program.
Assuming that one-third of the modified loans subsequently default, the FDIC projects around 1.5 million foreclosures will have been prevented.