FDIC Proposes to Streamline Loan Modifications – “Loan Mod in a Box”

The FDIC has made a plot to streamline loan modifications in an effort to stem the tide of foreclosures and REOS.  This plot, which is effective December 15, 2008, encourages the mortgage companies to modify certain nonperforming loans by the FDIC sharing up to 50% in any future losses incurred by those mortgage companies on defaulting modified loans.

The program would be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we can expect that about 50% can be modified, resulting in some 2.2 million loan modifications under the plot.

Fed chairman Ben Bernake spoke at the Federal Reserve System Conference on Housing and Mortgage Markets on December 4, 2008 and had this to say about the FDIC Proposal:

“Under the FDIC plot, servicers would restructure delinquent mortgages using a streamlined process, modeled on the IndyMac protocol, and would aim to reduce monthly payments to 31 percent of the borrower’s income.  As an inducement to lenders and servicers to undertake these modifications, the government would offer to share in any losses sustained in the event of redefaults on the modified mortgages and would also pay $1,000 to the servicer for each modification completed.¹³  The strengths of this plot include the standardization of the restructuring process and the fact that the restructured loans remain with the servicer, with the government being involved only when a redefault occurs. As noted, the FDIC plot would induce lenders and servicers to modify loans by offering a form of insurance against downside house price risk.”

FDIC’s Proposal:

This proposal is designed to promote wider adoption of such a systematic loan modification program:

1. by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and
2. sharing up to 50% of losses incurred if a modified loan should subsequently re-default

We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plot.

Details on Program Design

• Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties.

• Exclusion for Early Payment Default: To promote sustainable mortgages, government loss sharing would be available only after the borrower has made six payments on the modified mortgage.

• Standard NPV Test: In order to promote consistency and simplicity in implementation and audit, a standard test comparing the expected net present value (NPV) of modifying past due loans compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard assumptions will be used to ensure that a consistent standard for affordability is provided based on a 31% borrower mortgage debt-to-income ratio.

• Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.

• Reduced Loss Share Percentage for “Underwater Loans”: For LTVs above 100%, the government loss share will be progressively reduced from 50% to 20% as the current LTV rises.¹ If the LTV for the first lien exceeds 150%, no loss sharing would be provided.

• Simplified Loss Share Calculation: In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, small sale or REO sale, net of disposal costs as estimated according to industry standards. Interim modifications would be allowed.

• De minimis Test: To lower administrative costs, a de minimis test excludes from loss sharing any modification that did not lower the monthly payment at least 10 percent.

• Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of the modification.

Loan Modifications: Breach of Servicing Contracts?:

The issue remains, but,  as to  whether or not mortgage servicers have the authority to offer loan modifications on investor owned loans that have been that have been sliced and diced on Wall Street, securitized and then sold to multiple investors such as pension funds, hedge funds and insurance companies.

The mortgage companies that originated the loans no longer “own” those mortgages and it can become quite murky as to who really does own them.  Mortgage pools that are so diluted that it is impossible for mortgage servicers to EVER  secure 100% investor approval or cooperation in the loan modifications they perform. A mortgage servicer’s fiduciary duty is solely to their client investor and is governed by a set of instructions for servicing the pool of mortgage loans known as a ‘Pooling and Serving Agreement’ (PSA).

But, most PSAs authorize the servicer to modify loans that are either in default, or for which default is either imminent or reasonably foreseeable. Generally, permitted modifications include changing the interest rate on a prospective basis, forgiving principal,capitalizing arrearages and extending the maturity date.

Tags: loanmodification, subprime, mortgage, PSA, servicer, FDIC, loan mod in a box, wall street, real estate

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