FDIC Announces Loan "Mod In A Box" Program

Today the FDIC announced (here) a program for financial institutions that it regulates to utilize the same model it applied at IndyMac Bank after the FDIC took over the failed institution.  The information posted on the FDIC website is meant to contain a "comprehensive package of information to give servicers and financial institutions all of the tools necessary to implement a systematic and streamlined approach to modifying loans."  Under the program, borrowers who are delinquent on their mortgage payments may "receive a loan modification with a maximum 38% down to 31% housing-to-income ratio through the use of interest rate reduction, amortization term extension, and in some cases, principal deferment."

The loan modfication toolkit contains model documents for institutions to use at every step of the process.  It generally involves calculating what the borrower can afford in terms of monthly payment by taking 38% of the borrowers monthly income.  Then, the loan would be modified by a three-step "waterfall" process.  First, the interest rate would be reduced to as low as 3% for at least five years, with it increasing incrementally to the Freddie Mac weekly survey rate in effect at the time of the modification.  If this does not bring the monthly payment down to the affordable level, then the term of the original loan would be extended by 10 years (i.e. a 30 year mortgage would become a 40 year mortgage).  Finally, if this does not yield a low enough monthly payment, the lender would reduce the principal of the loan.  The FDIC also provides a net present value tool to "ensure that the modified payment creates a positive economic scenario for the investor."

The FDIC believes that the loan modification program can be used for virtually any mortgage, whether or not it has been securitized and sold to investors as part of mortgage-backed security.  The FDIC's overview document states that "Loans serviced for private investors are governed by servicing contracts which often contain a standard clause allowing the servicer to modify seriously delinquent or defaulted mortgages, or mortgages where default is 'reasonably foreseeable.'  This even holds true for complex private label securitizations with many tranches and investors."

The role of investors in mortgage backed securities in loan modification programs is currently undefined.  Although the FDIC believes that most servicing agreements would permit loan modification, investors in Countrywide mortgage-backed securities have threatened litigation over Bank of America's (which acquired Countrywide) agreement to modify loans at a potential cost of $8.4 billion in order to settle allegations of predatory lending brought by various state attorneys general.  The investors believe that the agreement improperly shifts these costs to them.  The D&O Diary blog has a great post on this subject (here).

Comments

[Mike Stover]

Sounds like the Mo Mod that I have been seeing on the internet. I hope Sheila Bair and the FDIC will take some action, and use sound approaches to solve this solution. I been seeing everything about Smithfield Wainwright when concerning the Mo Mod

[Sam Easley]

I have a second mortgage - 30 year note on a condo that is now rental property - the LTV must be 100% or more at this point. This loan is with Citi. Is it eligible for the Mod in a box deal that the FDIC is using at Indy and now at Citi?

[beachdude]

Loan modification mortgage is a process whereby a home owner's mortgage is modified and both the lender and homeowner are bound by the new terms of the new mortgage. The most common loan modifications are listed below:

lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above

Check out this Public site at http://LOANMODIFICATIONMORTGAGE.ORG

[Brett Adams]

Who knows what's going to happen. Here in Miami people who need to sell their house have few options since they are under water. Or they are in complete denial that their house is worth less than half of what they owe on it. If you bought in the last 5 years and didn't put a large amount of money down, you're stuck. Most people are starting to figure out that the banks can't or won't help them and they feel helpless.