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FDIC Chairman Sheila Bair wants to force banks to reduce principal for homeowners on brink of foreclosure

Leave it to the Federal Deposit Insurance Corp.’s assertive Sheila Bair to come up with a sensible plan to attack foreclosures

While Obama’s Treasury Department has tried to bribe and shame lenders to modify mortgages, so far, not surprisingly, they are simply taking the money and stonewalling as desperate homeowners go under.

The problem is the huge inflation in housing prices – and inane lending standards during the boom years – saddled millions of homeowners with inflated mortgages that make not a bit of sense in today’s market.

Mike Rockwood has modified five of his own loans, including his personal residence and investment property. He has created a top-notch workbook to walk you through the steps of fighting to get the best terms on your loan modification.

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Shelia Bair has unveiled a plan that cuts to the heart of the matter

One way to deal with this is to force banks to cut the amount owed on some of these loans, painful for lenders, but probably the only way to start at least slowing down the raging foreclosure epidemic.

The FDIC, which has taken over 124 failed banks this year, may seek to have lenders that sign loss-sharing agreements when acquiring the assets do more than cut interest rates or defer the loan’s principal, Bair said today in an interview at Bloomberg’s Washington office.

“We’re looking now at whether we should provide some further loss sharing for principal write downs,” Bair said. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

In September, Bair urged banks that are sharing losses with her agency to temporarily reduce mortgage payments for out-of- work borrowers. U.S. unemployment soared to a 26-year high of 10.2 percent in November.

The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.

“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal writedowns.”

Under the average loss-sharing agreement, the FDIC pays as much as 80 percent of losses on a residential mortgage up to a set threshold, with the acquiring bank absorbing 20 percent. Any losses exceeding the threshold are reimbursed at 95 percent of the losses booked by the acquirer.

“For the acquiring banks, it’s great because now they get more protection for the assets that they’re picking up and they have more flexibility in dealing with the problems,” John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell LLP in New York and is a former FDIC attorney, said in a telephone interview.

Principal reductions will help borrowers who are “underwater” on their payment-option adjustable-rate mortgages, whose principal expands over time, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.

“In order to make those loans affordable and give those homeowners a reason to stay rather than walk away, principal reduction is going to be key,” Gordon said.

Rep. Barney Frank, chairman of the House Financial Services Committee has floated his own proposal to extend loans to unemployed homeowners.

But while that at least addresses the issue, it also threatens to bury homeowners under even larger amounts of debt.

As one of Washington’s more powerful regulators, Bair has the power to cut through the malarkey and come up with a solution, even if it is unpopular in the banking industry.
Source: http://www.bloomberg.com/apps/news?pid=20601103&sid=aW0UJVi0Xnfs

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Homeowners – Need Some Sound Advice?

Get Out of Debt Workbook
Seasoned debt expert shares several little known but highly effective techniques guaranteed to get you out of debt fast – no matter how much you currently owe.
Stop Foreclosure
Get more help on fighting to stop a foreclosure with one of 7 options. For example, if a loan modification is not an option learn about a little-known government program that will stop a foreclosure in less than a day without an expensive attorney.

Also get the latest foreclosure news around the country, read Q&As and other resources.

Legally Restore Your Credit
If you are visiting this blog, you likely have mortgage lates, which are a big blemish on your credit report. Once you resolve your mortgage situation, you can legally remove those mortgage lates and all derogatory credit from your report without having to hire an expensive attorney or credit repair service.

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  4. Forcing banks to approve loan modification may be unexpected blessing from robo-signing foreclosure document scandal
  5. North Carolina homeowners frustrated with banks slow response to modify their loans

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