FDIC Proposes Mortgage Plan For Unemployed

FDIC Forbearance Program Proposed

In an attempt to prevent further foreclosures and mitigate the amount of losses on failed bank assets, the FDIC proposes that acquirers of failed banks initiate a forbearance plan for unemployed homeowners.

As part of its loss-share agreement with acquirers of failed FDIC-insured institutions, the FDIC is encouraging its loss-share partner institutions to consider temporarily reducing mortgage payments for borrowers who are unemployed or underemployed.

“With more Americans suffering through unemployment or cuts in their paychecks, we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures. This is simply good business since foreclosure rarely benefits lenders and would cost the FDIC more money, not less,” said FDIC Chairman Sheila C. Bair. “This is a win-win for the borrower, who can remain in his or her home while looking for a new job…

The recommendation to loss-share partners applies where unemployment, or underemployment, is the primary cause for default on a home mortgage. In such cases, the FDIC is urging its loss-share partners to consider the borrower for a temporary forbearance plan, reducing the loan payment to an affordable level for at least six months. The monthly payment during this period should be established based on an affordable payment – given the borrower’s circumstances – and it should allow for reasonable living expenses after payment of mortgage-related expenses.

Acquirers of failed insured institutions who agree to a loss-share arrangement with the FDIC must abide by the FDIC Mortgage Loan Modification program for assets purchased from the failed institution… The program provides for the modification of “qualifying loans” – those that meet certain criteria – by reducing the borrower’s monthly housing debt to income ratio (DTI ratio) to no more than 31 percent at the time of the modification and eliminating adjustable interest rate and negative amortization features.

Will The FDIC Plan Work?

Note that the FDIC forbearance plan goes beyond current government efforts at refinancing or modifying a mortgage, which require that the borrower show sufficient income to afford the monthly payment.  The forbearance plan is for unemployed or underemployed homeowners who, due to their circumstances, are usually in dire financial straits.   There are some who think that the FDIC’s plan, although well intentioned, may ultimately wind up saving few homeowners.

From a practical standpoint, the FDIC plan may ultimately benefit very few homeowners for the following reasons:

  • The program is only available to those homeowners who have mortgages with failed banks that were acquired by another institution under a loss-share agreement with the FDIC.
  • Under the forbearance agreement, the bank will accept only a portion of the regular mortgage payment.  The FDIC is asking for only a 6 month forbearance.  Given the prospects of a “jobless economic recovery” and the difficulty in finding new employment, the FDIC appears wildly optimistic about a quick change in fortune for an unemployed homeowner.
  • The mortgage foreclosure prevention plans currently in effect have had dismal success rates and these programs are limited to candidates who have income.
  • The FDIC recommends that the lender establish an “affordable payment” for six months, allowing for reasonable living expenses.  Many homeowners with jobs are struggling to make their mortgage payments.   It is likely that any payment (other than zero) will be too high for unemployed homeowners.
  • Recent statistics on the “cure rate” for delinquent mortgages show a stunning decline.   Many of those financially able to catch up apparently saw no benefit in doing so; either the burden of home ownership outweighed the benefits or there was no perceived benefit in continuing to make payments on a home with large negative equity.

Jobs Recovery Ultimately Needed To Cure Defaulting Mortgages

Regulators have already closed 92 banking institutions in 2009 with many more banking failures predicted.  Given the large losses incurred by the FDIC on banking failures, it makes sense to attempt to mitigate further losses by curtailing foreclosures.  The FDIC forbearance plan, however, will probably not save many unemployed homeowners from foreclosure unless we see a rapid improvement in the economy with vigorous job creation.

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