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FDIC Challenges Treasury with New Loan Modification Proposal

November 18th, 2008 3:29 PM by Lehel Szucs

FDIC Challenges Treasury with New Loan Modification Proposal

On the heels of the Treasury and Federal Housing Finance Agency's (FHFA) loan modification plan for Fannie Mae and Freddie Mac, the FDIC releases their own proposal. In this unprecedented, unilateral, and aggressive move by a Federal agency the FDIC is essential fighting a very public political battle directly with the Treasury and the current Administration.

FDIC Chairman Sheila Bair has undeniably been the early champion of loan modification, starting her campaign for such a program from the beginning of the mortgage meltdown.

She received an early opportunity to prove the approach following the seizure of failed IndyMac Bank. Quickly making loan modifications the central element of stabilizing IndyMac Federal Bank, the FDIC has worked out over 60,000 troubled loans.

Consequently, there is support that the program may be the best opportunity to bring aid to homeowners and prevent growing foreclosures. However, the plan seem to meet a brick wall with Treasury and the White House, opting to focus on the market aspect of the financial crisis. However, Congressional and Democrat support for refocusing on Main Street is beginning to tip the scales.

These political battles are now playing out on the public stage.

Beginning with a dramatic reversal of TARP policy, the Treasury scrapped the original concept of buying trouble assets in favor of their own FHFA implemented Fannie Mae and Freddie Mac loan modification program. This program is limited in that it only applies to Fannie and Freddie own or serviced loans, largely consisting of prime loans.

Critics harbor that this program is insignificant since, by FHFA's own admission, most trouble loans are outside the bounds of this program explaining, "Private label securities represent less than 20 percent of the mortgages, but 60 percent o the serious delinquencies."

This announcement and growing political cover from Congressional Democrats, like Christopher Dodd (D-CT), and perhaps even President-elect Barack Obama seems to have given Chairman Bair the confidence to step into the hornet's nest.

Her FDIC proposal seems to be a direct affront to the Treasury plan. Here are a few stark examples:


  • FDIC's standard of affordability is 31 percent of borrower income, opposed to the 38 percent in the FHFA plan
  • FDIC's program provides a 50 percent shared default guarantee to insure portions of potential laon loss to lenders. FHFA offers no insurance or guarantee against modified losses
  • FDIC will pay and incentive of $1000, compared to the FHFA incentive of $800 for each loan modification
  • FDIC "offers" to be the Treasury's contractor in administering the loan modification program because of their "extensive experience"

Sure looks like two Federal agencies competing for banks' loan modification business.

Posted in:General
Posted by Lehel Szucs on November 18th, 2008 3:29 PM

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